Treasury NPV

UNITED STATES DEPARTMENT OF THE TREASURY
OFFICE OF FINANCIAL STABILITY
Two Year Retrospective
Troubled Asset Relief Program:
Troubled Asset Relief Program Ofce of Financial Stability
October 2010
..
...ifthere'sonethingthathasunifiedDemocratsandRepublicans,andeverybodyinbetween,it'sthat weallhatedthebankbailout.Ihatedit.Youhatedit.Itwasaboutaspopularasarootcanal. ButwhenIranforPresident,IpromisedIwouldn'tjustdowhatwaspopularIwoulddowhatwas necessary.Andifwehadallowedthemeltdownofthefinancialsystem,unemploymentmightbedouble whatitistoday.Morebusinesseswouldcertainlyhaveclosed.Morehomeswouldhavesurelybeenlost. SoIsupportedthelastadministration'seffortstocreatethefinancialrescueprogram.Andwhenwe tookthatprogramover,wemadeitmoretransparentandmoreaccountable.Andasaresult,the marketsarenowstabilized,andwe'verecoveredmostofthemoneywespentonthebanks.
PresidentObama,January27,2010
TARPSummaryTable:
As of September 30, 2010 Bank capital programs Automotive companies AIG Credit Markets Public Private Investment Program Term Asset-Backed Loan Facility SBA 7a Securities Purchase Program Community Development Capital Initiative Treasury housing programs 2 Totals
*Less than $10 million as of 8/31/2010 1/ Amount was $30 billion, but was reduced to $22 billion in July 2010. 2/ Treasury's housing expenditures are not expected to be repaid and Treasury does not receive income or warrants related to these programs. 3/ Amount was $50 billion, but was reduced to approximately $46 billion in July 2010. 4/ Expenditures under the housing programs are made incrementally over time.
1
Maximum Allocation $ $ $ $ $ $ $ $ 250 82 70 22.4 4.3 0.4 0.8 45.6 $475

3 1
Total Spent $ $ $ $ $ $ $ $ 245 80 48 14.2 0.1 0.4 0.6 0.5 $388

4
Repayments $ $ 192 11
% Repaid 78% 14% $ $
Income 26.8 2.6
0.43
3%
0.2 *
n/a $204
n/a 53%
n/a $30
.................................................................................................................................................. TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 i
TableofContents ..
Section 1. MessagefromtheActingAssistantSecretary.......................................................................... 2. ExecutiveSummary.................................................................................................................. 3. TARPOverview......................................................................................................................... A. TheFinancialCrisisandtheNeedfortheTroubledAssetReliefProgram....................... B. TheBushAdministrationsActionsUnderTARP.............................................................. C. TheObamaAdministrationsActionsUnderTARP.......................................................... D. TARPWillCostaFractionofWhatWasExpected........................................................... E. ExitFromTARPPrograms................................................................................................ F. FinancialRegulatoryReform........................................................................................... 4. StabilizationoftheFinancialMarkets..................................................................................... A. TARPContributedtoFinancialStability........................................................................... B. TARPWasPartoftheGovernmentsCoordinatedEfforts.............................................. C. ChallengesLieAheadtoAchievingaFullRecovery.................................. 5. TARPProgramDescriptions...................................................................................................... A. CapitalPurchaseProgram................................................................................................. B. SupervisoryCapitalAssessmentProgramandCapitalAssistanceProgram..................... C. TargetedInvestmentProgram.......................................................................................... D. AssetGuaranteeProgram................................................................................................. E. WarrantDispositions........................................................................................................ F. CommunityDevelopmentCapitalInitiative..................................................................... G. TermAssetBackedSecuritiesLoanFacility...................................................................... H. PublicPrivateInvestmentProgram.................................................................................. I. SBA7(a)SecuritiesPurchaseProgram.............................................................................. J. AutomotiveIndustryFinancingProgram......................................................................... K. AmericanInternationalGroup,Inc.(AIG)......................................................................... 6. RetrospectiveontheTARPHousingInitiatives......................................................................... A. TheCrisis.......................................................................................................................... B. PolicyResponses.............................................................................................................. C. DesignofHAMP............................................................................................................... D. HAMPTargeting............................................................................................................... E. EarlySuccessesandChallenges....................................................................................... F. TheSecondPhaseofHAMP............................................................................................. G. Accomplishments............................................................................................................. H. TransparencyandAccountability..................................................................................... I. LookingAheadforHousing.............................................................................................. J. SummaryDescriptionofHousingPrograms..................................................................... 7. ExecutiveCompensation.......................................................................................................... 8. U.S.GovernmentasaShareholder.......................................................................................... Page 1 2 9 9 9 10 13 14 15 16 16 20 20 22 22 28 29 30 32 33 34 37 42 44 49 58 58 60 61 64 65 69 72 75 76 77 80 83
.................................................................................................................................................. TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 ii
TableofContents ..
Section 9. AccountabilityandTransparency............................................................................................. A. ComprehensiveMeasures............................................................................................... B. AuditedFinancialStatements......................................................................................... C. OversightbyFourSeparateAgencies............................................................................. D. CongressionalHearingsandTestimony.......................................................................... 10. AdditionalResources............................................................................................................... A. Glossary........................................................................................................................... B. LinkstoFurtherInformation........................................................................................... Page 84 84 84 85 85 86 86 92
.................................................................................................................................................. TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 iii
1.MessagefromtheActingAssistantSecretaryforFinancialStability ..
October5,2010 LadiesandGentlemen: October3,2010markedthesecondanniversaryoftheEmergencyEconomicStabilizationActthat createdtheTroubledAssetReliefProgram(TARP)andtheendoftheauthoritytomakenewfinancial commitments.Therefore,thisisanappropriatetimetoreflectonwhatTARPhasaccomplished. TheTARPwas,andis,anenormouscommitmentoftaxpayermoney.AndTARPhasbeenunpopularfor goodreasonnoonelikesusingtaxdollarstorescuefinancialinstitutions.However,byobjective measures,TARPworked.Twoyearslater,ourfinancialsystemisstable,morethan$204billionofTARP fundshavebeenrepaid,onlyaquarteroftheoriginal$700billionauthorizationremainsoutstanding, thetotalestimatedcostofTARPhasbeencutbymorethanthreefourths,taxpayershavereceived$30 billioninincome,andtheTARPbankprogramsareontracktomakesolidreturnsfortaxpayers. TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandthe economyperforminthefuture.Iffinancialandeconomicconditionsdeteriorate,prospectsforTARP investmentswillalsodeteriorate.ButinlightoftherecentlyannouncedAIGrestructuringandwhen valuedatcurrentmarketprices,TreasurynowestimatesthatthetotalcostofTARPwillbeabout$50 billion.Inaddition,usingthesameassumptions,weestimatethatthecombinedcostofTARPprograms andotherTreasuryinterestsinAIGwillbeabout$30billion.Thecostsareexpectedtocomefrom lossesrelatedtoTARPinvestmentsinautocompaniesandinitiativestohelpresponsiblehomeowners avoidforeclosure. Goingforward,theDepartmentoftheTreasurywillcontinuetomanagetheinvestmentsprudently whileworkingwiththecompaniestorecoverasmuchofthetaxpayersfundsaspossible.Wewillalso continueoureffortstohelpdistressedhomeowners.Andwewilltakethesestepswhilemaintaining comprehensiveaccountabilityandtransparencyfortheTARPprograms. Thismilestonealsomarkedthedeparture,onSeptember30,2010,ofHerbertM.Allison,Jr.asthe AssistantSecretaryforFinancialStability.AsSecretaryGeithnerhassaid,thefactthatTARPisnow regardedbymanyexpertsasoneofthemosteffectiveemergencyprogramsinfinancialhistoryisa directresultofHerbsleadership." Sincerely, TimothyG.Massad ActingAssistantSecretaryforFinancialStability
.................................................................................................................................................. TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 1
2.ExecutiveSummary ..
October3,2010markedthesecondanniversaryoftheEmergencyEconomicStabilizationAct(EESA) thatcreatedtheTroubledAssetReliefProgram(TARP)andtheendoftheauthoritytomakenew financialcommitments. EESAwasanintegralpartofthegovernmentsprogramtoresolvethefinancialcrisisof2008andearly 2009.AlongsidetheactionsoftheFederalReserveandtheFDIC,andthetaxcutsandinvestmentsset forthintheAmericanRecoveryandReinvestmentAct,thefinancialactionsauthorizedunderEESAwere criticalinpreventingadevastatingcollapseofourfinancialsystemandrestartingeconomicgrowth. Wenowhaverecoveredmostoftheinvestmentswemadeinthebanks.Taxpayerswilllikelyearna profitontheinvestmentsthegovernmentmadeinbanksandAIG,withTARPlosseslimitedto investmentsintheautomobileindustryandhousingprograms.Andwehavealreadyreturnedhundreds ofbillionsofunusedauthoritytothetaxpayertohelpreduceourdebtandfuturebudgetdeficits. TARP,ofcourse,wasnottheanswertoallofAmericaschallenges,andwehavemanystillahead.The U.S.economyishealing,butataslowerpacethanweneed.MillionsofAmericansarestilloutofwork andatriskoflosingtheirhomes.Smallbusinessesinmanypartsofthecountrystillfinditveryhardto getaccesstocredit.Americanfamiliesarestillworkingtoreducedebtandrebuildtheirsavings. Andalthoughthedirectfiscalcostoftheemergencyfinancialprogramswilllikelybeaverysmall fractionofinitialprojectionsandsignificantlylowerthanthesavingsandloancrisisofthe1980s,the overallfiscalandeconomiccostsofthiscrisisaresubstantial,andwilltakesignificantlymoretimeto address. Therecordofthefinancialprogramsisdefinedbythefollowingkeyaccomplishments: 1. TARPwasremarkablyeffectiveinhelpingtounfreezethemarketsforcreditandcapital, bringdownthecostofborrowing,restoreconfidenceinthefinancialsystem,andrestart economicgrowth. Atthepeakofthecrisis,bankswerenotmakingnewloanstobusinesses,oreventooneanother. Businessescouldnotgetfinancinginourcapitalmarkets.Municipalitiesandstategovernmentscould notissuebondsatreasonablerates.Thesecuritizationmarketswhichprovidefinancingforcredit cards,studentloans,autoloansandotherconsumerfinancinghadbasicallystoppedfunctioning.The economywascontractingatanacceleratingrate,withmillionsofAmericanslosingtheirjobs. Bythemiddleof2009,becauseofthecombinedimpactofthegovernmentsfinancialprograms, borrowingrateshadfallensharplyforbusinesses,individuals,andstateandlocalgovernments. Companieswereabletofundthemselvesinprivatemarketsbyissuingequityandlongtermdebt. Housingpricesbegantostabilize.ThevalueofthesavingsofAmericanworkershadbeguntorecover. Andeconomicgrowthturnedfromnegativetopositive.
Figure2A:
MortgageRates,30year
Percent 7 Percent Percent 10 7
9
CorporateBondBaaYield
Percent 10 9 8 7 6 5 4 2003 2006 CrisisPeak Today 3 3.5 4
MunicipalBonds,10yearYield
Percent 4.5 Percent 4.5
8 7
6 5
3.5
4 2003 2006 CrisisPeak Today
2. TheprojectedcostsofTARPhavefallenbyabout$300billion. Independentobservers,suchastheCongressionalBudgetOffice,initiallyprojectedthatTARPwould cost$350billionormore.Now,becauseofthesuccessoftheprogram,TARPwilllikelycostafractionof thisamount. WeexpectthatTARPinvestmentsinthebanksandthecreditmarketprogramswillbeprofitable.The recentlyannouncedrestructuringofAIGwillacceleratethegovernmentsexitontermsthatarelikelyto leadtoanoverallprofitonthegovernmentssupportforAIG,includingthevalueofTreasurysinterests inAIGheldoutsideofTARP.MostofthecostofTARPisexpectedtocomefromtwosources:expected lossesrelatedtoTARPinvestmentsinautocompaniesandinitiativestohelpresponsiblehomeowners avoidforeclosure. TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandthe economyperforminthefuture.Iffinancialandeconomicconditionsdeteriorate,prospectsforTARP investmentswillalsodeteriorate.ButinlightoftherecentlyannouncedAIGrestructuringandwhen valuedatcurrentmarketprices,TreasurynowestimatesthatthetotalcostofTARPwillbeabout$50 billion.Inaddition,usingthesameassumptions,weestimatethatthecombinedcostofTARPprograms andotherTreasuryinterestsinAIGwillbeabout$30billion.
Figure2B:
Preliminary Treasury Estimates of the impact of TARP Programs and Other Treasury Investments in AIG on the Federal Budget
1/
($U.S. billions) TARP Bank Programs AIG (TARP) TARP Credit Market Programs TARP Auto Programs TARP Housing Programs Total TARP Cost Other Treasury AIG Investments Total Treasury Cost
1/
16 -5
4/
2/ 3/ 2/ 2/ 2/
1 -17 -46 -51 22 -29
5/
Estimates for AIG reflect the impact of the recently announced restructuring of the government's interests in the firm. Treasury and the Federal Reserve made several investments in AIG. These investments have been restructured over time and are closely intertwined. In particular, Treasury holds investments in AIG in two forms: equity investments made through TARP and equity provided to a trust for Treasury's benefit in connection with the Federal Reserve's creation of a credit facility for AIG. Preliminary estimates for end August. Change for autos from previously-published estimate primarlly reflects increase in valuation of investments in Ally Financial Inc. (formerly known as GMAC, Inc.). due to improved market conditions. After the proposed restructuring of AIG, TARP will hold 1.09 billion shares of AIG common stock, plus preferred equity interests in SPVs of approximately $22.3 billion, against a cost basis of $69.8 billion. Valuing the common equity at the market close for October 1 of $38.86 per share implies a net cost of -$5.1 billion. Includes PPIP, TALF, CDCI and SBA.
2/
3/
4/ 5/
OutsideofTARP,weexpecttoincursubstantiallossesfromFannieMaeandFreddieMac(Government SponsoredEnterprises,orGSEs),throughcapitalinjectionsfromTreasurytotheGSEsthroughthe PreferredStockPurchaseAgreements(PSPAs).Theselossesstemfrompoorcreditchoicesandbadrisk managementdecisionsbeforetheFederalHousingFinanceAgency(FHFA)placedtheGSEsin conservatorshipinlate2008notactionstakenin2009or2010. However,asubstantialpartofthegovernmentsprojectedlossesonitssupportfortheGSEswillbe offsetbyrevenuefromtwosources.UnderauthorityprovidedbytheHousingandEconomicRecovery Act(HERA),Treasurypurchasedmorethan$200billioninmortgagebackedsecuritiesguaranteedbythe GSEs.Thoseinvestmentsaregeneratingnotablereturns.Inaddition,asaresultofitsemergency financialprograms,remittancesfromFederalReserveoperationstotheFederalBudgethaveincreased sharplyin2009and2010,andtheyareprojectedtoremainelevatedforsometime.Whileconsiderable uncertaintyremains,revenuesfromthesetwosourceswillsignificantlyoffsettolikelylosseselsewhere. Wecurrentlyexpectthattheoveralldirectfiscalcostofallourfinancialinterventionswillbelessthan onepercentofGDP.Thisresultisnotablecomparedpastsystemicfinancialcrises.AnInternational
After the proposed restructuring of AIG, Treasury will receive 563 million shares of AIG common in connection with the wind-down of the Federal Reserve credit facility, in addtion to the shares noted in footnote 3. Valuing those shares at the market closing price for October 1 of $38.86 per share implies a profit to the Treasury of $21.9 billion.
MonetaryFundstudyfoundthattheaveragenetfiscalcostofresolvingroughly40bankingcrisessince 1970was13percentofGDP.AndaccordingtotheGovernmentAccountabilityOffice(GAO),thenet fiscalcostofcleaninguptheU.S.savingsandloancrisiswas2.4percentofGDP. Theseestimatesprovideameaningfulwaytocomparethedirectfiscalcostofresolvingfinancialcrises acrosscountriesandtime.However,ourestimatesdonotreflectthefulleconomicandfiscalcostsof thiscrisis,whethermeasuredinthemillionsofAmericansstillsearchingforwork,thelostincomefor business,ortheimpactoftherecessiononFederalandStatebudgets.ButbecauseTARPwasso effectiveatmuchlowercostthanexpected,weareinamuchstrongerpositionthanwewould otherwisehavebeentoaddresstheverysubstantialeconomicchallengeswestillfaceasacountry. 3. Wearemovingquicklytorecoverthegovernmentsinvestmentsandtowithdrawfrom thefinancialsystem. Wehavealreadymadesubstantialprogressinrecoveringtaxpayerinvestments,endingemergency governmentprograms,andexitingfromthefinancialsystem. Inthemostacutephaseofthecrisisattheendof2008,TARPpreferredstockinvestmentsweremadein financialinstitutionsthatheldapproximately88percentofthetotalassetsofourbankingsystem. Today,weholdpreferredstockinvestmentsinfinancialinstitutionsthatholdapproximately10percent ofthetotalassetsofthesystem. Injusttwoyears,wehavealreadyrecoveredthreefourthsoftheTARPfundsinvestedinbanks,andwe havegenerated$27billioninincomefromourinvestmentsinbanks. WewillfinishsellingourinvestmentinCitigroupearlynextyear.Wewillalsoexitfromgovernment investmentsinAIGandtheautomotiveindustrymuchfasterthananyonepredicted.GeneralMotorsis planninganinitialpublicofferingforlaterthisyearthatwillallowustobegintoselldown,andAIGhas announcedarestructuringplanthatwillacceleratethetimelineforrepayingthegovernmentandput taxpayersinaconsiderablystrongerpositiontorecoupourinvestmentinthecompany. Figure2C:
Share of Bank Holding Company Assets Held by Firms with Outstanding CPP Prefered Equity Percent Percent 100 100 -1.0 80 80 60 40 20 0 Peak 10.1 Current* 87.5 60 40 20 0
* Excludes Citigroup common stock holdings which should be sold by early 2011.
Wehaveclosedorareintheprocessofwindingdownnearlyallotheremergencygovernment programs.TreasuryterminatedtheMoneyMarketFundGuaranteeprogramlastyear,resultingina profittotaxpayers.TheFDICsTemporaryLiquidityGuaranteeProgram(TLGP)fordebtisclosedtonew commitments,andthelevelofparticipationintheTLGPfortransactionaccountshasfallentoroughly onequarterofitspeak.NearlyalloftheFederalReservesliquidityprogramshavebeenshutdownand generatedsignificantrevenues. 4. TwocriticalelementsoftheObamaAdministrationsstrategywerethestresstestto forcebankstoraiseprivatecapitalandaseriesofinnovativeprogramstojumpstartcredit marketsandfinancingforconsumers,businesses,andhomeowners. WhenPresidentObamatookofficemanywereconvincedthattheonlywaytostabilizethebanking systemwaswithlargeadditionalinjectionsofpubliccapitalornationalizationstepsthatwouldhave entailedsignificantrisksandcosts.ThePresidentchoseadifferentpath,subjectingmajorU.S.financial institutionstoastresstestandforcingthemtostrengthencapitalthroughprivatefundraising.Since theresultsofthetestswerereleasedlastMay,thoseinstitutionshaveraisedintheaggregateover$150 billioninprivatecapital.Onlyoneofthe19institutionssubjectedtothetestsneededtoaccessTARP aftertheresultswerereleased.AndallbutsixofthoseinstitutionshaverepaidallTARPfundsthey receivedataprofittotaxpayers. OnepopularmisconceptionisthatTreasuryundertheObamaAdministrationinjectedmassiveamounts ofTARPfundsintolargebanks.Infact,sinceJanuary20,2009,Treasuryhasprovidedonly$11billionto banksunderCPP,alargepartofwhichwenttooverfourhundredsmallandcommunitybanks. Meanwhile,thegovernmenthasgottenoutofthebusinessofguaranteeingnewlyissuedbankdebt. Nearly50percentofsuchnewissuancewasguaranteedbythegovernmentinJanuary2009.The governmenthasnotguaranteedonedollarofnewissuancein2010. WhentheAdministrationtookoffice,thecreditmarketsthathelpprovideaccesstoloanstoconsumers andbusinesseshadfrozen.TreasuryeffortstounfreezethesemarketsincludingthroughtheTerm AssetBackedSecuritiesLoanFacility(TALF),thePublicPrivateInvestmentProgram(PPIP),andtheSBA 7(a)SecuritiesPurchaseProgramhavehelpedtomakecreditmoreavailableandareexpectedto generaterevenuesnotcostsfortaxpayers.SincethegovernmentlaunchedTALFinMarch2009, pricesforsecuritiesbackedbyconsumerandbusinessloanshaveimprovedsignificantlyandnew issuanceofsuchassetbackedsecuritieshasaveraged$12billionpermonth,comparedtolessthan$2 billionpermonthinthesixmonthspriortotheprogramslaunch.Similarly,sincetheannouncementof PPIPinMarch2009,pricesforeligibleresidentialandcommercialmortgagebackedsecurities(i.e., RMBSandCMBS)haveincreasedbyasmuchas75percent.Asaresult,bothprogramshavehelped removesignificantimpedimentstonewcreditforconsumers,businesses,andhomeowners. Inaddition,underTARP,TreasurylaunchedtheMakingHomeAffordableProgram(MHA),which includestheHomeAffordableModificationProgram(HAMP). After18months,HAMPhashelpedmorethan1.3millionhomeownersbyreducingtheirmortgage paymentstomoreaffordablelevels.Thisincludesmorethan460,000homeownerswhosemortgage termshavebeenmodifiedpermanently.Thesehomeownershaveexperienceda36percentmedian reductionintheirmortgagepaymentsmorethan$500permonthamountingtoatotal,program widesavingsforhomeownersofmorethan$3.2billion.MHAhasalsospurredthemortgageindustryto adoptsimilarprogramsthathavehelpedmillionsmoreatnocosttothetaxpayer.
Inaddition,TreasurylaunchedtheHousingFinanceAgency(HFA)InnovationFundfortheHardestHit HousingMarkets(HFAHardestHitFund,orHHF)tohelpstatehousingfinanceagenciesprovide additionalrelieftohomeownersinthestateshithardestbyunemploymentandhousepricedeclines, andTreasuryandtheDepartmentofHousingandUrbanDevelopment(HUD)enhancedtheFHAShort Refinanceprogramtoenablemorehomeownerswhosemortgagesexceedthevalueoftheirhomesto refinanceintomoreaffordablemortgagesiftheirlendersagreetoreduceprincipalbyatleast10%. TheU.S.financialsystemismuchstrongertoday,andinastrongpositiontosupporteconomic recovery. Thepolicyresponsetothecrisishasbroughtaboutanessentialrestructuringofthefinancialsystem. Theweakestpartsofthefinancialsystemnolongerexist.Ofthe20largestfinancialinstitutionsinthe fallof2008,fournolongerexistasindependententities,fiveweresubjecttomajorinterventionsby regulators,twoagreedtobecomesubjecttomuchgreateroversight,and10havehadsignificant changesinseniormanagement.Thefirmsthatremainhadtomeetamarkettestforviabilitytheyhad todemonstratetheycouldraisesubstantialamountsofprivatecapital. Today,ourfinancialsystemhassubstantiallyhigherlevelsofcapitalrelativetoriskthanbeforethecrisis andmorecapitalrelativetoglobalcompetitors.Atthesametime,weledtheeffort,workingwithother countries,todesignandimposehighercapitalrequirementsinternationallysothatbankswillnot becomesoundercapitalizedagain. AndtheDoddFrankWallStreetReformandConsumerProtectionActof2010(theDoddFrankAct)will significantlyreducethethreatoffuturefinancialcrises.Nolongerwillamajornonbankfirmescape comprehensivesupervisionandcapitalrequirements.Nolongerwillthegovernmentbeleftwithoutthe toolsitneedstowinddownamajorfirmintheeventofamajorfinancialcrisis.Nolongerwill derivativesortheshadowbankingsystembeleftinthedark.Andnolongerwillconsumersbeleft withoutadequateprotectionorthebasicinformationtheyneedtomakesoundchoices. Thenextstageoffinancialrepair. Eventhoughthemostdangerousphaseofthefinancialcrisisisbehindus,westillhavesubstantialwork todotorepairthedamage. TheAdministrationwillcontinuetohelpresponsiblebutatriskhomeowners,whilereformingtheU.S. housingfinancesystem.InadditiontotheMHA,theHFAHardestHitFundandFHAShortRefinance programsdiscussedabove,TreasurycontinuestosupportnewhousingcreditthroughthePreferred StockPurchaseAgreementswithFannieMaeandFreddieMac(theGSEs).Treasuryisalsoworkingwith HUDandotheragenciestodevelopproposalstoreformU.S.housingfinanceandrestructuretheGSEs. Inrecentmonths,wehavereceivedinputfromavarietyofstakeholderstoinformthatprocess,and haveheldconferencestoheartheviewsofcitizenadvocacygroups,economists,investors,market researchers,originators,securitizers,servicers,andprivatemortgageinsurersonreform.Wewill provideacomprehensivereformproposaltoCongressbyJanuary2011andwillworktoensurethenew systemwilldeliveramorestablehousingmarketwithstrongerregulationandaclearerroleof governmentwithlessriskbornebytheAmericantaxpayer.Whereguaranteesorsupportisprovided,it willbeexplicitandpricedappropriately.
BeyondthemeasurestakenunderEESA,wearecontinuingtoprovidesupportforsmallbusinesses, manyofwhicharestillstrugglingtoaccesscredit,expandandhirenewworkers.Lastweek,the PresidentsignedintolawtheSmallBusinessJobsAct.Thislegislationestablishestwonewandseparate Treasurylendinginitiatives:aSmallBusinessLendingFundthatwillprovideupto$30billionincapitalto communitybankswithincentivestoincreasetheirsmallbusinesslending,andaStateSmallBusiness CreditInitiativethatwillspur$15billioninprivatesectorlendingbystrengtheningsmallbusiness programsthreatenedbystatebudgetcuts.TheSmallBusinessJobsActalsoincludesenhancementsto SBAprogramsthatwillhelpcreditworthysmallbusinessesaccessloans,aswellaseightnewsmall businesstaxcutsthatprovideincentivesforsmallbusinessestoinvestandexpand. Finally,thereisstillworktobedoneinmanagingourremainingTARPcommitments.Foreclosure mitigationprogramswillcontinuetorequiresubstantialoversightofmortgageservicerstoensurethat theseinitiativesareeffectivelyimplemented.Whilemostofthelargestbankshaverepaidtheir obligationstoTARP,westillhaveinvestmentsinover600banks.Wewillworkwiththeseinstitutions, andtheirregulators,toacceleraterepaymentwhereappropriate.Wewillalsoworktoensurethat restructuringplansforourinvestmentsinAIGandtheautoindustryareexecutedsuccessfully.Andwe willcontinuetobetransparentinallofourefforts. WhenTARPwascreated,theworldarounduswasfallingapart.Andinthatmoment,when familiesandbusinesseswereworriedlikeneverbeforeabouttheirbasiceconomicsecurity, leadersfrombothpartiesstoodup,stoodtogether,andasAmericans,didwhatwasbestforthe country.Theydidsomethingunpopular,butnecessary.Andwearemuchbetteroffasaresult.
3.TARPOverview ..
Inthisoverview,wediscusswhyTARPwasnecessary,theresultsandcurrentstatusoftheactionstaken underTARP,itscosts,itseffectonachievingstabilizationoffinancialmarkets,andTreasurysplanstowind downtheprogram. A. TheFinancialCrisisandtheNeedfortheTroubledAssetReliefProgram. InSeptember2008,thenationwasinthemidstofoneoftheworstfinancialcrisesinourhistory.The financialinstitutionsandmarketsthatAmericansrelyupontoprotecttheirsavings,helpfinancetheir childrenseducation,andhelppaytheirbills,andthatbusinessesrelyupontomakepayroll,build inventories,fundnewinvestments,andcreatenewjobs,werethreatenedunlikeatanytimesincetheGreat Depression.Acrossthecountry,peoplewererapidlylosingconfidenceinourfinancialsystemandinthe governmentsabilitytosafeguardtheireconomicfuture. Thecausesofthecrisiswillbestudiedforyears,andthisreportisnotmeanttoprovideacomprehensive analysisofwhythecrisisoccurred.Butsomereasonsareclear.Overthetwodecadesprecedingthecrisis, thefinancialsystemhadgrownrapidlyinanenvironmentofeconomicgrowthandstability.Risksgrewin thesystemwithoutadequatetransparency.Laxregulationsandloopholesinsupervisionletfirmsbecome highlyleveragedandtakeontoomuchrisk.Amplecreditaroundtheworldfueledanunsustainablehousing boominthefirsthalfofthelastdecade.Whenthehousingmarketinevitablyturneddown,startingin2006, thepaceofmortgagedefaultsacceleratedatanunprecedentedrate.Bymid2007,risingmortgagedefaults wereunderminingtheperformanceofmanyinvestmentsheldbymajorfinancialinstitutions. Thecrisisbeganinthesummerof2007andgraduallyincreasedinintensityandmomentumoverthecourse ofthefollowingyear.Aseriesofmajorfinancialinstitutions,includingCountrywideFinancial,BearStearns, andIndyMac,failed;andFannieMaeandFreddieMac,thelargestpurchasersandguarantorsofhomeloans inthemortgagemarket,cameunderseverestress. BySeptember2008,forthefirsttimein80years,theU.S.financialsystemwasatriskofcollapse.Agrowing senseofpanicwasproducingtheclassicsignsofageneralizedrunonthebanks.Peoplestrustand confidenceinthestabilityofmajorinstitutions,andthecapacityofthegovernmenttocontainthedamage, werevanishing. Oursystemofregulationandsupervisionhadfailedtoconstraintheexcessiveuseofleverageandthelevel ofriskinthefinancialsystem,andtheUnitedStatesenteredthiscrisiswithoutadequatetoolstomanageit. TheExecutiveBranchdidnothaveexistingoptionsformanagingfailuresofsystemicallyimportantnonbank financialinstitutions. TheTreasuryDepartment,theFederalReserve,theFDIC,andothergovernmentbodiesundertookanarray ofemergencyactionstopreventacollapseandthedangersposedtoconsumers,businesses,andthe broadereconomy.However,thesevereconditionsournationfacedrequiredadditionalresourcesand authorities.Therefore,theBushAdministrationproposedEESAinlateSeptember,andwiththesupportof DemocratsandRepublicansinCongress,itwasenactedintolawonOctober3,2008. B. TheBushAdministrationsActionsunderTARP TheTARPwasoriginallyproposedasameansforthegovernmenttobuymortgageloans,mortgagebacked securitiesandcertainotherassetsfrombanks.Thefactthatitwasnotusedforthispurposepromptlyafter passagehasledtocriticismoftheprogram.However,byearlyOctober2008,lendingevenbetweenbanks hadpracticallystopped,creditmarketshadshutdown,andmanyfinancialinstitutionswerefacingsevere
3.TARPOverview ..
stress.Itwasalsoclearthattherewasnotsufficienttimetoimplementaprogramtobuymortgagerelated assets,giventhechallengesofvaluingtroubledassetsandquicklybuildingtheadministrativeinfrastructure topurchaselargevolumesofthoseassets. Inthiscontext,immediatecapitalinjectionswereneededtostabilizethebanksandavertapotential catastrophe.Thelawprovidedforthisapproach,becausetheauthoritieshadbeenbroadenedinthe legislativeprocesstocoverthepurchaseofanyfinancialinstrumentiftheSecretaryoftheTreasury,after consultationwiththeChairmanoftheFederalReserve,determinedthiswasnecessarytopromotefinancial stability.Thiswasalsotheapproachthatmanyothercountriestookatthattime.Therefore,theBush AdministrationlaunchedtheCapitalPurchaseProgramandlatertheTargetedInvestmentProgramto providethissupport. UndertheBushAdministration,duringthefallandwinterof2008,TARPfundswereusedasfollows: $234billionwasinvestedinbanksandthrifts,including$165billionineightofthelargest financialinstitutionsinthecountry,andadditionalfundswerecommittedtoguaranteeassetsof twoofthelargestbanks; $40billionwasinvestedinAmericanInternationalGroup(AIG),alongwithadditionalfundsfrom theFederalReserve;and Approximately$20billioninloanswasprovidedtotheautoindustry. C. TheObamaAdministrationsActionsunderTARP InJanuary2009,PresidentelectObamafacedacombinationofacutefinancialandeconomicchallenges. Theeconomywasinafullfledgedrecession.Thenationhadlostover3.5millionjobsin2008,andwas losingadditionaljobsattherateofroughly750,000permonthinthefirstquarterof2009.Businesses aroundtheworldwerecuttingbackinvestmentsthatareessentialtogrowth.Tradeamongnationshad contractedsharply.Homepriceswerefalling,andforeclosureswereincreasing.Insteadofcatalyzing recovery,thefinancialsystemwasworkingagainstrecovery.Thesystemwasstillfragile,andtherecession wasputtingevengreaterpressureonbanks.Thisdangerousdynamicneededtobehaltedimmediately. TogetherwiththefiscalstimulusenactedundertheAmericanRecoveryandReinvestmentAct,theFinancial StabilityPlanannouncedinFebruary2009laidouttheObamaAdministrationscomprehensive,forcefuland sustainedcommitmenttoensurethestabilityofthefinancialsystem,assistinthecleanupoflegacyassets, jumpstarttheprovisionofnewcreditforhouseholdsandbusinesses,andsupportdistressedhousing markets.Aspartofthatplan,theTreasuryDepartmenthastakenthefollowingactionsunderTARPoverthe last20months: 1. RecapitalizingtheBankingSystem Ourfinancialsystemneededtoberecapitalized.Butprivatecapitalcouldnotberaiseduntilthecondition ofthemajorfinancialinstitutionswasmadeclear.Treasuryworkedwiththefederalbankingregulatorsto developacomprehensive,forwardlookingstresstestforthenineteenlargestbankholdingcompaniesto determinewhichoneswouldneedmorecapitaltoremainwellcapitalizedifeconomicconditions deterioratedsignificantlymorethanexpected.Thestresstestwasconductedwithunprecedented opennessandtransparency,whichhelpedrestoremarketconfidenceinourfinancialsystem.Since completionofthestresstest,thesebankshaveraisedanaggregateofmorethan$150billioninprivate
3.TARPOverview ..
capital,andtwelveofthestresstestbanksthathadTARPinvestmentshaverepaidthegovernmentinfull. Treasuryallowedbanksneedingcapitaltoapplyforfurtherassistancefromthegovernment,butonlyone didso. TreasuryestimatesthatthecapitalprogramsdevelopedunderTARPtosupportallbanks,takentogether, willresultinagaintothetaxpayer.SeeSection5ProgramDescriptions,pages2233. 2. JumpstartingtheCreditMarketsthatareCriticaltoProvidingFinancingtoConsumersand Businesses Becausethecrisishadfrozencreditmarkets,Treasurylaunchedthreeprogramstohelprestartthem: TheTermAssetBackedSecuritiesLoanFacility(TALF),ajointprogramwiththeFederalReserve, helpedtorestarttheassetbackedsecuritizationmarketsthatprovidecredittoconsumersand smallbusinesses; TheLegacySecuritiesPublicPrivateInvestmentProgram(PPIP),matchedTARPfundswith privatecapitaltopurchaselegacymortgagerelatedsecurities;and TheSBA7(a)SecuritiesPurchaseProgram,inwhichTreasurycommittedtohelpunlockcreditfor smallbusinessesbyprovidingcapitalinexchangeforsecuritiesbackedbysmallbusinessloans. Treasuryestimatesthattheseprograms,takentogether,willresultinminimalornocostsunderTARP.See Section5ProgramDescriptions,pages3443. 3. StabilizingtheAutomotiveIndustryandAIG TreasuryprovidedadditionalassistancetoGMandChryslerontheconditionthatthosecompanies fundamentallyrestructuretheirbusinesses.Theserestructuringsinvolvedsacrificesfromallstakeholders shareholders,unions,autodealers,andcreditorsandhaveenabledthecompaniestobecomemore competitive.Thisassistancealsohelpedthemanysuppliersandancillarybusinessesthatdependonthe automotiveindustry. TreasuryalsotookstepstorestructuretheassistancethathadbeenprovidedtotheAmericanInternational Group,Inc.(AIG)undertheBushAdministration.Thisinvolvedmakinganadditionalcommitmentof supportandworkingwithAIGtowardrepayingthegovernmentbysellingnoncorebusinessesand completingotherrestructuringinitiatives. InTreasurysmostrecentofficialestimate,theseinvestmentswillresultinaportionofthecostsunder TARP.However,theprospectsforrepaymenttothetaxpayerareimprovingasthecompaniescontinueto strengthen.SeeSection5ProgramDescriptions,pages4457. 4. SupportforSmallandMidSizedBanks WhiletheObamaAdministrationmadenofurtherinvestmentsinthenationslargestbanks,Treasury invested$11billioninmorethan400otherbanksandthrifts,mostofwhichweresmallandcommunity banks.Inrecognitionofthefactthattheyhadfeweralternativestoraisecapital,thesmallestbankswere alsogivenadditionaltimetoapplyforassistance.Becausecommunitydevelopmentfinancialinstitutions servesmallbusinessesandconsumersinthecommunitieshardesthitbytherecession,communitieswhich
3.TARPOverview ..
aretypicallyunderservedbylargefinancialinstitutions,aspecialprogramwasestablishedtohelpthese institutions. SeeSection5ProgramDescriptions,page33. 5. HelpingResponsiblebutStrugglingHomeowners WhentheObamaAdministrationtookoffice,thenationshousingmarkethadbeeninbroaddeclinefor18 months.EESAauthoritiesenabledTreasurytodevelopavoluntaryprogramthatwouldsupportservicers effortstomodifymortgages,consistentwiththeprotectionoftaxpayers.Whiletheseriouseffectsofthe recessionandfinancialcrisisonthehousingmarketandforeclosurespersist,thisAdministrationhastaken aggressiveactiononmanyfronts,includingunderTARP,andhasmadeconsiderableprogressinhelpingto stabilizethehousingmarket. TreasurylaunchedtheMakingHomeAffordable(MHA)program,whichincludestheHome AffordableModificationProgram(HAMP),underTARP.HAMPhashelpedhundredsof thousandsofresponsiblehomeownersreducetheirmortgagepaymentsbyanaverageof$500 permonthandavoidforeclosure.MHAhasalsospurredthemortgageindustrytoadoptsimilar programsthathavehelpedmillionsmoreatnocosttothetaxpayer. Asthehousingcrisishasevolved,Treasuryhasrespondedtotheunemploymentandnegativeequity problemsbyadjustingHAMPandinstitutingadditionalprograms.Forexample: TreasurylaunchedtheHousingFinanceAgency(HFA)HardestHitFundtohelpstatehousing financeagenciesprovideadditionalrelieftohomeownersinthestateshithardestby unemploymentandhousepricedeclines. TreasuryandtheDepartmentofHousingandUrbanDevelopment(HUD)enhancedtheFHA ShortRefinanceprogramtoenablemorehomeownerswhosemortgagesexceedthevalueof theirhomestorefinanceintomoreaffordablemortgages. Toprotecttaxpayers,MHAhousinginitiativeshavepayforsuccessincentives:fundsarespentonlywhen transactionsarecompletedandthereafteronlyaslongasthosecontractsremaininplace.Therefore,funds willbedisbursedovermanyyears.Thetotalcostofthehousingprogramscannotexceedandmaybeless than$46billion,whichistheamountcommittedtothatpurpose. SeeSection6RetrospectiveontheTARPHousingInitiatives,pages5879. 6. RecoveringTARPFunds OneofTreasurysprimaryobjectiveshasbeentogetTARPdollarsback.Sofar,morethan$200billionhas beenreturned.Inaddition,TARPinvestmentshavegenerated$30billionofproceedstotaxpayers,inthe formofdividendandinterestpaymentsandsalesofwarrants. Thesalesofwarrantshavebeenparticularlysuccessful.ThelawthatcreatedTARPrequires,inmostcases, aninstitutionreceivingTARPfundstogiveTreasurywarrantsthatallowtaxpayerstoparticipateinpotential additionalreturnswhentheinstitutionregainsfinancialstability.Bynegotiatingeffectivelywithbanks seekingtorepurchasetheirwarrantsdirectly,andbyeffectivelyauctioningthewarrantsofbanksthatelect nottorepurchase,Treasuryhasreceivedover$8billioninadditionalrevenuefortaxpayers.
3.TARPOverview ..
Figure3A:TARPIncomeasofSeptember30,2010
Bank warrant sales $8.2
Automotive programs $2.8 PPIP $0.2
Bank capital programs $18.6
Source: Treasury
SeeSection5ProgramDescriptions,page26,foradescriptionofcertaininstitutionsintheCapital PurchaseProgramthatrepresentlossesonTARPinvestments. 7. ImplementingExecutiveCompensationRestrictions ThelawthatcreatedTARP(asamendedbytheAmericanRecoveryandReinvestmentActof2009(ARRA)) imposesrestrictionsontheexecutivecompensationoftopmanagementofthoseinstitutionsthatreceived TARPfunds.Treasuryimplementedregulationstoenforcetheserestrictions,whichincludedcreatingthe OfficeoftheSpecialMasterforExecutiveCompensation.TheSpecialMasterhastakenstepstoensurethat executivepayattheTARPfirmsreceivingexceptionalassistancepromoteslongtermvaluecreationand financialstability. 8. ComprehensiveAccountabilityandTransparency TreasuryhasoperatedtheTARPprogramswithcomprehensivestandardsforaccountabilityand transparency.Voluminousdataandinformationhavebeenmadepublicandavailabletotaxpayers, observersandCongressonthewebsiteswww.FinancialStability.govand www.MakingHomeAffordable.gov.Thisincludesallcontractsgoverninganyinvestmentorexpenditureof TARPfunds,andmorethan275reportsovertwoyears.TreasurywillalsopublishinNovember comprehensiveauditedfinancialstatementsfortheTARPprograms,forthefiscalyearendingSeptember 30,2010,aswedidforthepreviousfiscalyear. D. TARPWillCostaFractionofWhatWasExpected ItisclearthatTARPwillcosttaxpayersafractionofthe$700billionoriginallyauthorized.TheTreasury Departmentseffortshaveconsistentlyreducedtheprogramscost.Wewillnotusemorethan$475billion ofTARPfunds,includingamountsalreadyexpendedandrecovered,andweexpecttorecovermostofthose funds,otherthanthefundsspentonhousingprograms,whichwerenotintendedtobereturned.
3.TARPOverview ..
InJuly2010,theObamaAdministrationandCongresscappedtheamountthatcouldbeinvested underTARPat$475billion,aonethirdreductionfromtheoriginalcommitmentauthorizedby Congress. Morethan$204billionofTARPfundsexpendedhavebeenrepaidincludingmorethan seventyfivepercentofthemoneyinvestedinlargebanks. TARPinvestmentshavealreadygeneratedreturnstotaxpayersfromdividends,interestand salesofwarrantsandothersecuritiesof$30billion. ThepayforsuccessfeaturesofTARPsMHAhousingprogramsassurethattaxpayerfunds areusedonlytotheextentthatprogramsachieveintendedresults.Inaddition,theTARP housingprogramshavealsocausedmortgageservicerstoadoptsimilarprogramsthathave helpedmillionsmorehomeownersatnocosttothetaxpayer.
TheultimatecostofTARPandourotherfinancialpolicieswilldependonhowfinancialmarketsandthe economyperforminthefuture.IffinancialandeconomicconditionsdeteriorateprospectsforTARP investmentswillalsodeteriorate.ButthemostuptodateTreasuryestimatesforTARPprograms,including theimpactoftheAIGrestructuring,nowsuggestthattotalfiscalimpactofTARPwillbetoincreasethe Federaldeficitbyabout$50billion.Moreover,otherTreasuryinvestmentsinAIGareexpectedtogenerate apositivereturnofabout$20billion.SeeFigure2BPreliminaryTreasuryEstimatesoftheImpactofTARP ProgramsandOtherTreasuryInvestmentsinAIGontheFederalBudgetinSection2ExecutiveSummary, page4. E. ExitStrategyandWindDown FinalpurchaseauthoritytomakecommitmentsunderTARPexpiredonOctober3,2010.Thismeansnonew commitmentstoinvestfundscanbemade.TheDepartmentoftheTreasurywillcontinuetowinddown TARPandmanagetheremainingTARPinvestmentsprudentlyinordertorecoverasmuchoftaxpayers fundsaspossible. 1. TARPInvestments AsofSeptember30,2010,Treasuryhasapproximately$184billioninTARPinvestmentsandcommitments outstanding,inover600banks,theautomotiveindustry,AIG,thePublicPrivateInvestmentProgramfunds andthepurchasedSBA7(a)securities1 ,butexclusiveofthehousinginitiatives.Treasuryintendstorecover ordisposeoftheseinvestmentsassoonaspracticable.Butgenerally,Treasurycannotdemandrepayment, sorecoveryrequiresthattheinstitutionsreplacegovernmentsupportwithprivatecapital.Thismeansthat thetimingofrepaymentsbyvariousinstitutionswilldiffer,aswillthetimeswhenthevariousTARP programsterminate.Forexample,underthebankcapitalsupportprograms,somefinancialinstitutionsare thrivingandhavetheabilitytorepayTreasurynoworintheverynearfuture.Otherinstitutionswillneed moretimetorecoverandrepayTreasury,asexpectedgiventheunevenimpactofthisfinancialcrisis.Exit fromthelargestremaininginvestmentswhichareintheautomotiveindustryandAIGwillalsotaketime inordertoprotectthereturnsforthetaxpayer.
1
Theamountoutstandingmaybeadjustedasfurtherrepaymentsarereceivedandcommittedbutundisbursed amountsforinvestmentsaremade.
3.TARPOverview ..
Inmostcases,theTARPinvestmentisintheformofnonvotingpreferredstock,forwhichTreasurycannot demandrepayment.Incertaincases,Treasuryownscommonstock:inGM(61percentoftheoutstanding shares)forwhichaninitialpublicofferingisexpectedbeforeyearend;AllyFinancial(formerlyGMAC,56 percent);Chrysler(9percent);andCitigroup(12.4percentasofSeptember30,2010).Uponconsummation oftherestructuringplanforAIGannouncedonSeptember30,2010,Treasurywillbethemajority shareholderofAIG. 2. HousingInitiatives InthisnextphaseofTARP,Treasurywillalsocompletetheimplementationofthehousinginitiatives. HAMP,theprincipalTARPhousingprogram,isdesignedsothatmostfundsaredisbursedoverafiveyear period,onapayforsuccessbasis.Thisensuresthattaxpayerdollarsareusedonlyaslongasmortgage modificationsremainineffectandborrowerscontinuetofulfilltheirresponsibilities. ServicersthatparticipateinHAMPcancontinuetomakemortgagemodificationsthroughtheendof2012. TheHFAHardestHitFundpermitsparticipatingstatehousingagenciestoprovidesupportthroughtheir programsuntilaslateas2017,dependingonavailablefunding.AndtheFHAShortRefinanceprogramis designedtoenablehomeownerstorefinancetheirmortgageloansandreducetheiroverallmortgagedebt throughtheendof2012.InmuchthesamewaythatHAMPsfirstlienmodificationprogramhasprovideda nationalblueprintformortgagemodifications,thesenewprogramswillcontinuetoreshapethemortgage servicingindustryandpromoteindustrystandardizationofshortsale,refinanceandprincipalreduction programs.However,theircostcannotexceedandmaybelessthanthe$46billionallocated. F. FinancialRegulatoryReform Theactionstakentocombatthefinancialcrisiswere,inpart,theresultofafundamentalfailureofthe structureoffinancialregulation.Regulatorsdidnothavethetoolstobreakapartorwinddownafailing financialfirmwithoutputtingtheentirefinancialsystematrisk.TheFDICsresolutionauthoritywaslimited toinsureddepositoryinstitutionsanddidnotincludetheirholdingcompanies.Withoutchangestothe system,thereisariskthatTARPandothergovernmentactionshadcreatedmoralhazard.Thatis, becausethefederalgovernmentsteppedintoprovideassistance,theprivatesectormayassumefederal governmentsupportwillbethereiftheyagaincauseasystemicrisktoourfinancialsystem.Therefore, beginningin2009,theObamaAdministrationfoughttopassacomprehensivefinancialreformlawtoreinin excessiveriskinourfinancialsystemsothatwewillnothavetoagainresorttoaTARPlikeprogram.InJuly thisyear,CongresspassedandPresidentObamasignedintolawthecomprehensivefinancialreform legislation,theDoddFrankWallStreetReformandConsumerProtectionActof2010.Therulesto implementtheDoddFrankActarecurrentlybeingwritten.Amongotherthings,thelegislationwill: Givethefederalgovernmenttheauthoritytoshutdownandbreakapartlargenonbank financialfirmswhoseimminentfailuremightthreatenthebroadersystem; PutinplaceaConsumerFinancialProtectionBureautopromotetransparencyandconsumer choice,andtopreventabusiveanddeceptivepractices; Givefinancialregulatorsthetoolstheyneedtocollectdataandanalyzeriskintheentire financialsystem,beyondindividualfirmsandmarkets,andtoidentifyandcurbrecklessrisk taking,sothatwecanhelppreventfuturecrises;and Createasafer,moretransparentderivativesmarket.
4.StabilizationoftheFinancialMarkets ..
ThereisbroadconsensusthattheTARPwasanimportantpartofabroadergovernmentstrategythat stabilizedtheU.S.financialsystembyrenewingtheflowofcreditandavertingamoreacutecrisisit eventuallyproveddecisiveenoughtostopthepanicandrestoremarketconfidence. CongressionalOversightPanel,TakingStock:WhatHastheTroubledAssetReliefProgramAchieved?, (December2009),page4. A. TARPContributedtoFinancialStability TheTroubledAssetReliefProgramhassucceededfaster,andatamuchlowercost,thanexpected. TARPhasplayedacriticalroleinhelpingtostabilizethefinancialsystemandinputtingtheeconomyina betterpositiontoconfrontthechallengesthatlieahead.Emergencygovernmentprogramshelpedto stabilizefinancialmarketsbyrebuildingconfidenceinourfinancialsystem,makingitpossibleforU.S. homeowners,consumers,andbusinessestoborrowatlowercostsandtheU.S.torecovermorerapidly fromasevererecession.Financialmarketdatashowsthatconditionshavesignificantlyimprovedsince thefallof2008. Fearthatourmajorfinancialinstitutionscouldfailhasreceded. Creditmarketsimportanttoconsumersandsmallbusinesseshavereopened. Businessesareabletoraiserecordamountsofcapitalinprivatemarkets. Mortgagerateshavebeenbroughtdowntohistoricallows. Municipalitiesareabletoborrowathistoricallylowrates. Whilesubstantialprogresshasbeenmade,oureconomystillhasalongwaytogotogetbacktonormal. Unemploymentisunacceptablyhighandthehousingmarkethasnotyetstabilized.Inthebanking system,chargeoffsforresidential,consumer,andcommercialloansarestillhigh,andtheFDICprojects thattherateofbankfailureswillremainhighforsometime.Despiteofferingrelativelylowborrowing costs,bankscontinuetoreportfallingloanbalances.Thisreflectsthefactthatwehaveendureda difficultrecessionandmanyborrowersandlendersarereducingdebtafteraperiodofaggressive growthinleverage.Butitmeansthatmanyresponsibleconsumersandbusinessesarestillfindingit difficulttogetnewcredit. Nevertheless,thankstothecoordinatedandforcefulactionsofCongress,theObamaAdministration, theFederalReserve,theFDIC,andotherregulatoryagencies,theU.S.financialsystemismuchstronger todaythanitwasinthefallof2008andearly2009. 1. TARPrestoredconfidenceinthefinancialsystem,loweringborrowingcostsforbusinesses, homeowners,andmunicipalities. TheprimarypurposeofTARPwastorestoretheliquidityandstabilityofourfinancialsystem.That systemplaysacriticalroleinoureconomy,forexample,byhelpingbusinessesraisefundsandpay employees,providingconsumerswithconvenientformsofcredit,financingeducation,andallowing millionsofAmericanstoownhomes. InSeptember2008,bankswerenotmakingnewloanstobusinesses,oreventooneanother. Businessescouldnotgetfinancinginourcapitalmarkets.Municipalitiesandstategovernmentscould notissuebondsatreasonablerates.Thesecuritizationmarketswhichprovidefinancingforcredit cards,studentloans,autoloansandotherconsumerfinancinghadbasicallystoppedfunctioning.
TARPprovidedthebufferthatthesystemneeded.Inconjunctionwiththestresstestsofourmajor banks,ithelpedforcethesystemtoraiseprivatecapital.AndmorebroadlyTARPprovidedabackstop thatallowedthecreditmarketstostartworkingagain. Figure4AshowsbankborrowingcostsrelativetoTreasuryborrowingcostoverthecourseofthecrisis. Duringthefinancialcrisisin2008,therewasadrasticspikeincostofbankborrowingcosts,followedby animproved,lowercostofborrowingafterimplementationoftheTARPandtheObama AdministrationsFinancialStabilityPlan. Figure4A:SpreadBetweenInterBankDepositRatesandYieldsonShorttermTreasuryBills
500 450 400 350 300
Finish ofworstweek forstock marketin75years TARPisenacted
CapitalPurchaseProgram isannounced
TARPfailstopass Congress
BasisPoints
250 200 150 100 50 0 2006 2007
BearStearnsacquired byJPMorgan
LehmanBrothers failure Treasuryandthe Federal ReservelaunchTALF
BNP Paribasfreezes3 investmentfunds Financial StabilityPlan
Stress test results announced
2008
2009
2010
FollowingthepassageofTARPandtheannouncementorimplementationofTARPprograms,borrowing costsdeclinedformanybusinesses,homeowners,andmunicipalities.Investmentgradecorporatebond spreadsfellbyalmost70percentin2009.Yieldsonhighqualitymunicipalbondratesfelltothree percentin2009,downfromfivepercentinfall2008.ThattranslatedintorealsavingsforAmericansand enabledoureconomytobegintorecover.
Figure4B:
MortgageRates,30year
Percent 7 Percent Percent 10 7 9 6 6 8 7 5 5 6 5 4 2003 2006 CrisisPeak Today 4 4 2003 2006 CrisisPeak Today
CorporateBondBaaYield
Percent 10 9 8 7 6 5 4
3 3.5 4
MunicipalBonds,10yearYield
Percent 4.5 Percent 4.5
3.5
2. Lowerborrowingcostshaveallowedbusinessestotapprivatefundingsourcesandmajor financialinstitutionstorecapitalizewithprivatefunds.
Asborrowingcostshavecomedown,businesseshaveraisedsubstantialcapitalfromprivatesourcesin 2009and2010.Corporations,forexample,raisedover$1trillionininvestmentgradedebtandover $180billioninhighyielddebtin2009.Whilemuchofthenewissuanceinearly2009wassupportedby governmentguarantees,privateinvestorsfundedmostnewcorporatedebtwithoutpublicsupportin late2009andin2010.Nearly50percentofnewissuancewasguaranteedbythegovernmentinJanuary 2009.Nonewissuancehasbeengovernmentguaranteedin2010. Theoverallstrengthinthefundingmarketshascontinuedinto2010.Thepaceofhighyieldissuanceso farthisyearisactuallyhigherthanin2009. Figure4C:
Itisimportanttonotethat,banksmanagedtoraisesubstantialprivatecapitalfollowingthereleaseof theresultsfromthefederalgovernmentstresstestofmajorU.S.financialinstitutions.Inthemonths aftertheresultswerereleased,banksissuedover$100billioninnewcommonequity.Asaresult,the U.S.bankingsystemismuchbettercapitalizedtoday
3. SecuritizationmarketshavecomebacktolifeasaresultofTALFandotherinitiatives. Securitizationmarketsthatprovideimportantchannelsofcreditforconsumersandsmallbusinesses havealsoimproved,inlargepartbecauseofprogramslaunchedundertheTARP.Announcements abouttheTermAssetBackedSecuritiesLoanFacility(TALF)helpednarrowspreadsinthesemarkets evenbeforetheprogrambeganoperating.In2009,spreadsonTALFeligibleassetbackedsecurities (ABS)fellbacktoprecrisislevelsandspreadsonnonTALFeligibleABSweredownmorethan90 percentfromtheirpeaksinthefallof2008.SincethegovernmentlaunchedTALFinMarch2009, issuanceofABSbackedbyconsumerandbusinessloanshaveaveraged$12billionpermonth,compared tolessthan$2billionpermonthinthesixmonthspriortotheprogramslaunch.Andaswithcorporate bonds,newissuanceintheABSmarkethasshiftedfrompublicsupporttopurelyprivatefinancing. Pricesforimpairedsecuritiesthatconstrainbanklendingalsoimprovedsignificantlystartingin2009. ThiswasdueinparttogeneralmarketimprovementandinparttoannouncementsforthePublic PrivateInvestmentProgram,whichwasdesignedtoremovethesesecuritiesfrombanks.Mostofthe PublicPrivateInvestmentFundswereformedbytheendof2009andhadstartedtopurchaselegacy securities.SincetheannouncementofPPIPinMarch2009,pricesofbenchmarkindicesforthenon agencyresidentialmortgagebackedsecuritiesandcommercialmortgagebackedsecuritieshave appreciatedbetween60percentand100percent.Thesepositivedevelopmentsreducedtheneedfor PPIPatthelevelsoriginallycontemplated. 4. Housingmarketsstabilizedtosomedegree. FollowingtheimplementationofTARP,housingmarketsbeganshowingsomesignsofstabilizingand wealthrecovery,whichshouldstimulateconsumerspendingvitaltoAmericaneconomicgrowth. Thanksinparttofederalgovernmentfinancialpolicies,mortgageratesremainnearhistoriclows.Home pricesstabilizedinMarch2009,followingconsistentdeclinessince2006.Forexample,theS&P/Case ShillerU.S.20CityCompositeHomePriceIndexexperienceda3percentyeartoyearincreaseinJuly, comparedtoa19percentyeartoyeardeclineinMarch2009. TheObamaAdministrationshousinginitiativesunderTARPwereintendedtohelppreventavoidable foreclosuresandstabilizethehousingmarket.EighteenmonthsintotheHAMPprogram,over1.3 millionhomeownershaveseentheirmonthlymortgagepaymentsreducedtoaffordablelevels, includingover460,000whoareinpermanentmodifications. Figure4D:
Source:FederalReserve
TheTARPhousinginitiativeshavealsospurredmortgageservicerstoadoptsimilarprograms,enhancing theircapacitytoengagewithhomeownerstomodifymortgagesandprovideadditionalsolutionsto avoidforeclosure.Thishashelpedmillionsmorehomeownersatnocosttothetaxpayer. 5. TheinvestmentsintheAutomotiveIndustryandAIGaccomplishedtheirpurposetheywere criticaltomaintainingfinancialstability. TheBushAdministrationprovidedloanstoGMandChryslerinDecember2008toavoiduncontrolled liquidationsintheindustrythatcouldhaveresultedinmillionsofjoblosses.TheObamaAdministration providedadditionalassistancetoGMandChryslerontheconditionthatthosecompanieswould fundamentallyrestructuretheirbusinesses.Inthe14monthssinceGMandChrysleremergedfrom bankruptcy,theautoindustryhasincreasedemploymentby62,100jobsandismuchstronger.Some TARPfundshavealreadybeenreturned,andGMispoisedforaninitialpublicoffering,whichwillallow thegovernmenttobeginsellingdownitsTARPinvestment. BeforethecrisistherewasinsufficientregulationandoversightofAIG,andnoneofthegovernment agencieswithsupervisoryauthorityhadamechanismtoprovidefortheorderlyunwinding,dismantling, sale,orliquidationofaglobal,nonbankfinancialinstitutionlikeAIG.But,today,theriskstoour economyposedbyAIGhavebeenreduced.OnSeptember30,2010,AIGandthegovernment announcedarestructuringplanthatwillacceleratethegovernmentsexitandputsusinastronger positiontorecovertaxpayersinvestments. B. TARPWasPartoftheGovernmentsCoordinatedEfforts Ascreditconditionshaveimproved,theU.S.economyhasstoppedcontractingandstartedtogrow again.Thenumberofjobsisalsogrowing,althoughataslowpace.Afterfourconsecutivequartersof negativegrowth,theeconomyexpandedatanannualrateof1.6percentinthethirdquarterof2009 andhascontinuedtogrowsince.Theunemploymentratehasfallenfromapeakof10.1percentin October2009to9.6percentinAugust. EconomicexpertsAlanBlinderandMarkZandi2 findthatTARPhasbeenasubstantialsuccessinhelping theeconomysnapbackmorerapidlythanwouldbeexpectedfromearly2009whentheU.S.was sufferingasevereeconomicdownturn.BlinderandZandiestimatethatwithoutgovernment interventionU.S.realGDPwouldhavefallenroughlythreetimeswhatweactuallyexperienced,andthe unemploymentratewouldhavepeakedat16.5percent. C. ChallengesLieAheadToAchievingaFullRecovery Thefinancialandeconomicrecoverystillfacessignificantheadwinds.TARPandthebroaderresponseto thefinancialcrisishavebeensuccessfulincriticalways.Thosepolicieshavecontainedthemost significantfinancialcrisisourcountryhasfacedsincetheGreatDepression.Buttheeconomyhasalong waytogotorecoverfullyfromthedeepcontractiongeneratedbythecrisis. Thecontractioninmanycategoriesofbanklendingreflectsacombinationofpersistentweakdemand forcreditandtightlendingstandardsatthebanks,amidstcontinuedpressureonmanybankbalance sheets,particularlyfromcommercialmortgagelosses.Banklendingcontinuestocontractoverall, althoughthepaceofcontractionhasmoderatedandsomecategoriesoflendingaregrowingagain.For
2
BlinderandZandi,HowtheGreatRecessionWasBroughttoanEnd,July27,2010.
example,commercialandindustrialloanscontractedatanannualrateof27percentinthethirdquarter of2009,buttheyexpandedinthethirdquarterof2010.Suchloansareparticularlyimportantforsmall businesses,whichgenerallycannotraisemoneybyissuingdebtinsecuritiesmarkets. Figure4E:
Source:FederalReserveAssetsandLiabilitiesofBanks(H.8). Note:Adjustedformergeractivityandaccountingchanges
AlthoughRealtyTracreportsthatJuly2010foreclosureactivitywas10percentlowerthaninJuly2009, foreclosureswerestillupnearly20percentsinceJuly2008,andJuly2010markedtheseventeenth consecutivemonthofforeclosureactivityexceeding300,000filings.
5.TARPInvestmentProgramDescriptions ..
A. CapitalPurchaseProgram EESAwasoriginallyproposedasameanstobuymortgageloans,mortgagebackedsecuritiesandcertain otherassetsfrombanks.However,theauthoritiesgrantedunderEESAwerebroadenedinthelegislative processtocoveranyfinancialinstrumentwhosepurchasetheSecretaryoftheTreasury,after consultationwiththeChairmanoftheFederalReserve,determinesnecessarytopromotefinancial marketstability.ShortlyfollowingpassageofEESA,lendingevenbetweenbankshadpracticallystopped, creditmarketshadshutdown,andmanyfinancialinstitutionswerefacingseverestress.Giventhehigh levelofuncertaintyinfinancialmarketsandtheeconomy,evenstrongfinancialinstitutionsbeganto hoardcapital.Therewasnotsufficienttimetoimplementaprogramtobuymortgagerelatedassets, whichposeddifficultiesrelatedtovaluingsuchassetsandgettingtheholdersofsuchassetstosellthem atcurrentprices.Basedonmarketindicators,itbecameclearthatfinancialinstitutionsneeded additionalcapitaltosustainanormalflowofcredittobusinessesandconsumersduringthefinancial turmoilandeconomicdownturn.Inthiscontext,immediatecapitalinjectionsintofinancialinstitutions wereanecessarysteptoavertapotentialcollapseofthesystem. Asaresult,TreasurylaunchedtheCapitalPurchaseProgram(CPP),thelargestandmostsignificant programunderEESA,onOctober14,2008.TreasuryinitiallycommittedoverathirdofthetotalTARP funding,$250billion,totheCPP,whichwaslaterloweredto$218billioninMarch2009.Atthecloseof theprogram,Treasuryhadinvestedapproximately$205billionundertheCapitalPurchaseProgram. 1. ProgramandGoals TheCapitalPurchaseProgramwasdesignedtobolsterthecapitalpositionofviableinstitutionsofall sizesand,indoingso,tobuildconfidenceintheseinstitutionsandthefinancialsystemasawhole.With theadditionalcapital,CPPparticipantswerebetterequippedtoundertakenewlendingandcontinueto provideotherservicestoconsumersandbusinesses,evenwhileabsorbingwritedownsandchargeoffs onloansthatwerenotperforming. Ofthe$250billionintotalpossiblecommitments,Treasuryinvested$125billionineightofthe countryslargestfinancialinstitutions.3 Theremaining$125billionwasmadeavailabletoqualifying financialinstitutions(QFIs)ofallsizesandtypesacrossthecountry,includingbanks,savingsandloan associations,bankholdingcompaniesandsavingsandloanholdingcompanies.QFIsinterestedin participatingintheprogramhadtosubmitanapplicationtotheirprimaryfederalbankingregulator. Theminimumsubscriptionamountavailabletoaparticipatinginstitutionwasonepercentofrisk weightedassets.Themaximumsubscriptionamountwasthelesserof$25billionorthreepercentof riskweightedassets. InthemonthsfollowingannouncementoftheCapitalPurchaseProgram,Treasuryprovided$205billion incapitalto707institutionsin48states,includingmorethan450smallandcommunitybanksand22 certifiedcommunitydevelopmentfinancialinstitutions(CDFIs)(seechart5Abelow).Thelargest investmentwas$25billionandthesmallestwas$301,000.ThefinalinvestmentundertheCPPwas madeinDecember2009. TheCPPfundswerenotgivenasgrants.Treasuryreceivedpreferredstockordebtsecuritiesin exchangefortheseinvestments.Thereisnofixeddateonwhichthebanksmustredeemthepreferred stockorrepayTreasury.ThisisnecessaryfortheinvestmenttoqualifyasTier1capitalunder
3
In2008,thesebanksrepresentedmorethanhalfofallbankassets.
regulatoryrequirements.However,thereareincentivesforthebankstorepay. 4 Institutionsmayrepay Treasuryafterconsultationwiththeappropriatefederalregulator.Todate,Treasuryhasreceived approximately$152billioninCPPrepayments. MostbanksparticipatingintheCapitalPurchaseProgrampayTreasuryadividendrateoffivepercent peryear,whichwillincreasetoninepercentayearafterthefirstfiveyears.InthecaseofSubchapterS corporations,Treasuryacquiressubordinateddebentures.Thesubordinateddebentureinterestrateis 7.7percentperyearforthefirstfiveyearsand13.8percentthereafter;however,thetotalamountofS corporationdividendspayableperyearislessthan$40million.Todate,Treasuryhasreceived approximately$10billioninCPPdividendsandinterestand$3billioninotherincomefromthesaleof Citigroupcommonstock(inexcessoftherecoveredprincipalamount). Treasuryalsoreceivedwarrantstopurchasecommonsharesorothersecuritiesfromthebanksatthe timeoftheCPPinvestment.Thepurposeoftheadditionalsecuritiesistoprovideopportunitiesfor taxpayerstoreapadditionalreturnsontheirinvestmentsasbanksrecover.Todate,Treasuryhas receivedmorethan$8billioninproceedsfromthesaleofCPPandTIPwarrants.Seepage32fora descriptionofthewarrantsandtheirsalebyTreasury. a. Roleofbankregulators ManyhaveaskedhowTreasurydecidedwhichbankswouldreceivefunds.Theprogramwasopentoall institutionsandaprocesswasestablishedtoensuredecisionsweremadeinafair,impartialand consistentmanner.TheprocessalsohelpedensurethattheprogramfulfilledTreasurysstatutory responsibilitiestopromotefinancialstabilityandprotectthetaxpayer.TheprocessrequiredthataQFI applytothefederalagencythatisitsprimaryregulatortheFederalReserve,theFDIC,theOfficeofthe ComptrolleroftheCurrencyortheOfficeofThriftSupervision.Theapplicationhadtoreceivethe positiverecommendationoftheregulator. Theregulatorsaremostfamiliarwiththeseinstitutionsbecausetheyperformperiodicsafetyand soundnessexaminationsthatincludedetailedanalysesofthebanksoverallfinancialconditionsand operations,e.g.,capital,assets,management,earnings,liquidity,andsensitivitytomarketrisk. Regulatorsalsoexaminetheinstitutionsforcompliancewithapplicablelawsandregulations. Nonetheless,Treasurydidnotdeferentirelytotheregulators.Treasuryconducteditsownreviewof everyapplicationthatreceivedapositivefundingrecommendationfromtheregulators.Treasurystaff reviewedthesuccessfulapplicationsandpresentedthemtoaninternalTARPinvestmentcommittee, whichinturnmaderecommendationstotheAssistantSecretaryforFinancialStabilityforafinal decision.Thisprocesswascriticaltoensuringobjectivedecisionmaking.TheSpecialInspectorGeneral forTARPdidanextensivereviewoftheprocessandconcludedinitsAugust2009reportthatthatitwas amostlyclearprocessenhancedbymultiplereviewsandcontrolmechanisms.
ThecontracttermsincludeanumberofincentivestoencouragebankstoreplaceTARPinvestmentswithprivate capital.Thesetermsincludeaprovisiontoincreasethedividendrateovertime,arestrictiononthebankfrom payingdividendstoitscommonshareholdersandarestrictiononrepurchasingsharesuntilthebankrepaysthe TARPpreferredstock.
b. Smallinstitutions TheCapitalPurchaseProgramisoftencharacterizedasabigbankprogramandmanypeople erroneouslybelievethatsmallinstitutionsdidnotbenefitfromthisprogram.Infact,smallerfinancial institutionsmakeupthevastmajorityofparticipantsintheCPP.Ofthe707applicationsapprovedand fundedbyTreasurythroughtheCapitalPurchaseProgrambythetimeitclosedonDecember31,2009, 473or67percentwereinstitutionswithlessthan$1billioninassets. Treasuryrecognizedthat,toallowsmallinstitutionstoparticipateinCPP,theprogramwouldneedto accommodatemorethanonecorporatestructure.Tothatend,TreasurypreparedCPPtransactional documentsforprivateinstitutions,mutualorganizations,andScorporationsinadditiontothe documentsforpubliclytradedinstitutions.Thevarietyofdocumentsaddressedthestructural complexityofincludinglargeandsmallinstitutions. Therateatwhichapplicationsweresubmitteddeclinedrapidlyinearly2009andover650banks withdrewnewapplications.Severalreasonshavebeencitedforthis.OnewasthatinFebruary2009, CongressadoptedmorerestrictiveexecutivecompensationrequirementsonallTARPrecipients.A secondwasthatmanybanksfelttherewasastigmaassociatedwithparticipationintheprogram.A thirdwasthattheseverityofthecrisishadlessenedsomewhat. InMay2009,aftermanylargerinstitutionsstartedraisingcapitalfromtheprivatedebtandequity markets,TreasuryreopenedtheCPPapplicationwindowforinstitutionswithlessthan$500millionin assets.Thisinitiativegavesmallerinstitutions,whichdidnothavethesameaccesstothecapital marketsaslargerinstitutions,anopportunitytoreceiveadditionalCPPinvestments,andTreasury increasedtheamountofcapitalavailabletosmallerinstitutionsundertheprogram.Originally, institutionswereeligibleforaCPPcapitalinvestmentthatrepresenteduptothreepercentofrisk weightedassets.UponreopeningtheCPPforsmallerinstitutions,Treasuryraisedtheamountoffunds availabletofivepercentofriskweightedassets,anddidnotrequireadditionalwarrantsforthe incrementalinvestment. ThechartbelowindicatestheassetsizeofthebanksparticipatingintheCapitalPurchaseProgram. Figure5A: CPPInitialInvestmentProfile ($inbillions) CPPParticipants Investment AssetRange* Number Percent Amount Percent <$1bn 473 66.9% 3.8 1.9% $1bn$10bn 177 25.0% 10.0 4.9% >$10bn 57 8.1% 191.1 93.3% Total 707 100% 204.9 100%
Source: SNLFi na nci a l ;Trea s ury
c. TARPbankinvestmentswerestructuredasnonvotingpreferredstock,whichprovided crucialcapitalsupportwithoutcreatinggovernmentcontrol AsdescribedinSection3onpage10,in2008Treasurydecidedthatthemosteffectivewaytotryto stabilizethenationsfinancialsystemwastoprovidecapitaltobanks.ThevastmajorityofTARP investmentsweremadeintheformofnonvotingpreferredstock.Inordertoachievetheobjectiveof providingcapitalsupport,andmeetbankregulatoryrequirementsforTier1capital,TARPcouldnot requirethatabankrepayTreasuryatafixeddate,asonewouldwithaloan. Preferredstockgenerallyisnonvoting(exceptinlimitedcircumstances),whilecommonstockhasfull votingrights.Therefore,mostTARPinvestmentsarenonvoting.Thepreferredstockdoesnotentitle Treasurytoboardseatsorboardobservers,exceptintheeventdividendsarenotpaidforsixquarters, inwhichcaseTreasuryhastherighttoelecttwodirectorstotheboard. 2. StatusasofSeptember2010 a. RepaymentsgettingTARPfundsback BanksmayrepayTreasuryundertheconditionsestablishedinthepurchaseagreementsasamendedby theARRA.Treasuryalsohastherighttosellthesecurities.However,Treasurydoesnothavetheright toforcerepayment.TherepaymentpriceisequaltowhatTreasurypaidfortheshares,plusanyunpaid dividendsorinterest. AsofSeptember30,2010,Treasuryhasreceivedover$152billioninCPPrepayments.Ofthatamount, approximately$13.4billionofrepaymentsisfromthesalesofCitigroupcommonstockthrough September30,2010. b. Returnsfortaxpayers 1) Dividendandinterestpayments Asistypicalforapreferredstockinvestment,banksmustdecidewhethertopaythedividends;theycan electinsteadtoconservetheircapital.Treasuryreceivedcumulativedividendswherepermittedby applicableregulation.Thatis,ifthedividendsarenotpaidinanyquarter,theyareaddedtothe liquidationpreference,thusincreasingtheclaimoftheholderofthepreferred.Inothercases,the dividendswerenoncumulative.CPPparticipantsareallowedtomakedividendpaymentswiththe approvaloftheirprimaryfederalregulator.Butifabankfailstopaydividendsforsixquarterlyperiods, Treasuryhastherighttoappointtwodirectorstothebanksboard. AsofSeptember30,2010,totaldividendsandinterestreceivedfromCapitalPurchaseProgram investmentsisapproximately$10billion.Inaddition,thesalesofCitigroupcommonstockthrough September30,2010havegenerated$3billionofincome(inexcessoftherecoveredprincipalamountof theCitigroupinvestmentreferredtoabove). 2) Overallreturns TheCPPwasasuccessnotonlyinstabilizingthefinancialsystem.Itwillalsogenerateapositivereturn totaxpayers,aswillthebanksupportprograms(CapitalPurchaseProgram,TargetedInvestment ProgramandAssetGuaranteeProgram)takenasawhole.Currently,Treasuryestimatesthatthenet
gainforallthreeprogramscombinedwillbe$16billion.Thisisonlyanestimateanditwilldependon severalfactors,includingmarketconditionsandperformanceofindividualcompanies.Someinitial observersoftheCPPinvestmentswerecritical,forexample,thatTreasuryoverpaidtomakethe investmentsineightofthenationslargestfinancialinstitutionsand/orthattheinstitutionswouldnot beabletorepay.Infact,allofthoseinstitutionshaverepaidthegovernmentinfullwiththeexception ofCitigroupwherepartoftheinvestmentisintheformofcommonstockwhichthegovernmentis currentlyintheprocessofselling.Inthatcase,thegovernmentexpectstocompleteitsexitbyearly nextyear.Fortheseveninstitutionswhichhavefullyrepaid,ourinternalrateofreturnonacombined basiswas11percent.WehavealsorealizedagainonourCitigroupsalestodateandexpecttorealizea gainoverallbasedonthecurrentmarketprice. 3) Certaininstitutions;missedpaymentsandappointmentofdirectors ThereturnsrealizedfrominvestmentsintheCapitalPurchaseProgramwillbepartiallyoffsetbylosses oninvestmentsincertaininstitutions.AsofSeptember30,2010,fiveinstitutionshavebeendeclared bankruptorhadtheirbankingsubsidiaryplacedinreceivership(CITGroupInc.,UCBHHoldings,Inc., MidwestBancHoldings,Inc.,SonomaValleyBancorp,andPacificCoastNationalBancorp),which representatotalinvestmentof$2.73billion.Todate,togetherwiththe$242millionofrealized discountonsales,asdescribedlaterinthisreport,lossesoninvestmentsareapproximately$3billion. ForthequarterlydividendpaymentdueinAugust2010,123institutionsmissedpayments5 ,consisting of96cumulativedividendpayments(approximately$41.5million),19noncumulativedividend payments(approximately$1.8million),andeightScorporationinterestpayments(approximately$1.6 million).Todate,21bankshavemissedfourpayments,15bankshavemissedfive,sixbankshave missedsix,andonebankhasmissedseven. Treasuryhasreleasedguidanceontheexerciseofitscontractualrighttonominatememberstoan institutionsboardofdirectors.Directorscannotbegovernmentemployeesandbylawtheymustactin theinterestsofallshareholders,notasTreasurysorthetaxpayersrepresentative.Treasurywill prioritizebanksinpartbasedonwhetheritsinvestmentexceeds$25million.Inaddition,Treasurywill seekabankspermissiontohaveanobserverattendboardmeetingsonceaninstitutionmissesfive dividends.Theobserverscanbegovernmentemployees.ThisproactivestepwillhelpTreasury determinewheretheappointmentofdirectorswouldbemosteffective.Iftherighttonominate memberstoaboardofdirectorsofabankbecomesexercisable,Treasurywilldeterminewhetherto nominateuptotwomembersbasedonanevaluationoftheconditionoftheinstitutionandthe functioningofitsboardofdirectors. 4) ExchangesandrestructuringstopreservevalueandprotecttaxpayerInterests Inlimitedcases,inordertoprotectthetaxpayersinterestinthevalueofaCPPinvestmentandto promotefinancialstability,TreasurymayexchangetheCPPpreferredstockforothersecurities. TreasuryevaluateswhethertoparticipateinanexchangeoftheCPPpreferredstockonthebasisof enablingthebanktogetnewinvestorstoprovideadditionalcapital,toconductacapitalrestructuring ortostrengthenitscapitalpositionandfinancialcondition.Exchangesmadeonthisbasismaybeata ratelessthanpar,andsalesbyTreasurytoanewinvestormaybemadeatadiscount.Treasuryhas
5
Dataexcludestheinstitutionsthathaveenteredbankruptcyorreceivershipatthetimethequarterlypayment wasdue.
describedtheconsiderationsforevaluatingexchangesandrestructuringsintheAgencyFinancialReport forFY2009,page41. c. UseoffundsbybanksparticipatingintheCapitalPurchaseProgram TreasuryworkedwiththeOfficeoftheSpecialInspectorGeneralfortheTroubledAssetReliefProgram (SIGTARP)onaUseofCapitalSurvey.ThescopeoftheannualUseofCapitalSurveycoverslending, financialintermediation,andcapitalbuildingactivitiesofeachfinancialinstitutionaftertheinvestment offundsundertheCPPfromthedatethefundswereinitiallyreceiveduntiltheendofthefourth quarter2009.TreasurysenttheUseofCapitalSurveytoCPPparticipantsinMarch2010,andreceived surveyresponsesfromthemajorityofCPPparticipants.Treasurypostedallsubmittedsurveysfrom individualCPPrecipientsandpublishedthenamesofthefinancialinstitutionsthatfailedtosubmita surveyresponsetoTreasury,ontheFinancialStability.govwebsite.Additionally,Treasuryposteda summaryofquantitativedata(summarybalancesheetandincomestatementinformationfromeach institutionsregulatoryfilings)foreachindividualCPPrecipientontheFinancialStability.govwebsite. d. ComparativelendingbyCPPbanks Thecapitalthatremainsinplaceatmanysmallandmediumsizedbanksisfacilitatingnewlendingwhile theyabsorblossesfromlegacyassets.Indeed,atbankswithlessthan$1billioninassetsthatreceived TARPcapital,mediantotalloanshavegrown3.3percentsince2008Q3,comparedwith1.6percentfor comparablysizedinstitutionsthatdidnotreceiveTARPfunds.Thedifferenceisevenlargerfor commercialandindustrialloans,andforcommercialrealestateloans,whichareespeciallyimportant forsmallbusinesses.
B. SupervisoryCapitalAssessmentProgram(StressTest)andCapitalAssistanceProgram WhiletheinvestmentsmadeundertheCapitalPurchaseProgramhelpedpreventacollapse,Treasury alsofocusedonhowtorecapitalizethesystemwithprivatecapital,sothatgovernmentsupportcould bepaidback.Butinlate2008andearly2009confidenceinourfinancialsystemhadbeenseverely eroded;investorsquestionedwhetherinstitutionswerehealthyenoughtosurvive,anddoubted whethermanyinstitutionsreallyknewtheirtruecondition.Therefore,acriticalpartoftheFinancial StabilityPlanannouncedbytheObamaAdministrationwastoconductastresstestonthemajor bankstodeterminetheirhealth,andtodosoinanopenandtransparentmannersothatthemarket wouldknowwhichbanksneededmorecapital.Inconjunctionwiththisforwardlookingtest,Treasury announcedthatitwouldprovidecapitalunderTARPthroughtheCapitalAssistanceProgram(CAP)to banksthatneededadditionalcapitalbutwereunabletoraiseitthroughprivatesources. 1. ProgramandGoals Inearly2009,TreasuryworkedwiththeFederalbankingagenciestodeveloptheonetime,forward lookingassessmentorstresstestknownastheSupervisoryCapitalAssessmentProgram(SCAP) onthenineteenlargestU.S.bankholdingcompanies(BHCs).Thedesignofthetestsandtheirresults weremadepublic,anovelstepthatwastakenbecauseoftheunprecedentedneedtorestore confidence.Byidentifyingandquantifyingpotentialcapitalshortfallsandrequiringthatadditional capitalberaisedtoeliminateanydeficiencies,theSCAPensuredthatthesefinancialinstitutionswould havesufficientcapitaltosustaintheirroleasintermediariesandcontinuetoprovideloansto creditworthyborrowersevenifeconomicconditionssufferedasevereandextendeddeterioration. Thestresstestfoundthatnineofthelargestbankholdingcompanieshadadequatecapitaltowithstand moresevereeconomicconditions.Ofthetenbankholdingcompaniesthatwereidentifiedasneeding toraisemorecapital,ninemetorexceededthecapitalraisingrequirementsthroughprivateefforts. Onlyoneinstitution,AllyFinancial(formerlyGMAC),requiredadditionalfundsunderTARPtomeetits SCAPrequirements,whichwasprovidedthroughtheAutomotiveIndustryFinancingProgram,notCAP. 2. StatusasofSeptember2010 SincetheresultsoftheSCAPwerereleasedinMay2009,intheaggregate,thestresstestfirmshave increasedrequisitecapitalbyover$150billion.Importantly,thatcapitalraisinghasenabledmorethan 80bankstorepaytheTARPinvestmentsmadebyTreasury. TheCapitalAssistanceProgramwasofferedtoallbanksandQFIs,notsolelytothosebanksthat underwenttheSCAP.AnothermeasureoftheeffectivenessofSCAPandtheCPP,aswellasother governmentefforts,isthatTreasurydidnotreceiveanyapplicationsforCAPwhichterminatedon November9,2009.
C. TargetedInvestmentProgram TreasuryestablishedtheTargetedInvestmentProgram(TIP)inDecember2008.Theprogramgavethe Treasurythenecessaryflexibilitytoprovideadditionalornewfundingtofinancialinstitutionsthatwere criticaltothefunctioningofthefinancialsystem.TheTIPwasconsideredexceptionalassistancefor purposesofexecutivecompensationrequirements(seeSection7). 1. ProgramandGoals ThroughtheTargetedInvestmentProgram,Treasurysoughttopreventalossofconfidenceincritical financialinstitutions,whichcouldresultinsignificantfinancialmarketdisruptions,threatenthefinancial strengthofsimilarlysituatedfinancialinstitutions,impairbroaderfinancialmarkets,andunderminethe overalleconomy.EligibilitytoparticipateintheTIPwasdeterminedonacasebycasebasis,and dependedonanumberoffactors.Treasuryconsidered,amongotherthings: Theextenttowhichthefailureofaninstitutioncouldthreatentheviabilityofitscreditors andcounterpartiesbecauseoftheirdirectexposurestotheinstitution; Thenumberandsizeoffinancialinstitutionsthatareperceivedorknownbyinvestorsor counterpartiesassimilarlysituatedtothefailinginstitution,orthatwouldotherwisebe likelytoexperienceindirectcontagioneffectsfromthefailureoftheinstitution; Whethertheinstitutionissufficientlyimportanttothenationsfinancialandeconomic systemthatadisorderlyfailurewould,withahighprobability,causemajordisruptionsto creditmarketsorpaymentsandsettlementsystems,seriouslydestabilizekeyassetprices, orsignificantlyincreaseuncertaintyorlossofconfidence,therebymateriallyweakening overalleconomicperformance;and Theextentandprobabilityoftheinstitutionsabilitytoaccessalternativesourcesofcapital andliquidity,whetherfromtheprivatesectororothersourcesofgovernmentfunds. Treasuryinvested$20billionineachofBankofAmericaandCitigroupundertheTargetedInvestment Program,whichinvestmentswereinadditiontothosethatthebanksreceivedundertheCPP.Likethe CapitalPurchaseProgram,Treasuryinvestedinpreferredstock,andreceivedwarrantstopurchase commonstockintheinstitutions.However,theTIPinvestmentsprovidedforannualdividendsofeight percent,whichwashigherthantheCPPrate,andalsoimposedgreaterreportingrequirementsand moreoneroustermsonthecompaniesthanundertheCPPterms,includingrestrictingdividendsto $0.01pershareperquarter,restrictionsonexecutivecompensation,restrictionsoncorporateexpenses, andothermeasures. 2. StatusasofSeptember2010 InDecember2009,bothparticipatinginstitutionsrepaidtheirTIPinvestmentsinfull,withdividends. TotaldividendsreceivedfromTargetedInvestmentPrograminvestmentswas$3billion.Treasuryalso receivedwarrantsfromeachbankwhichprovidethetaxpayerwithadditionalgainontheinvestments. Asaconsequence,theprogramisclosedandresultedinapositivereturnfortaxpayers.
D. AssetGuaranteeProgram 1. ProgramandGoals UndertheAssetGuaranteeProgram(AGP),Treasuryactedtosupportthevalueofcertainassetsheldby qualifyingfinancialinstitutions,byagreeingtoabsorbaportionofthelossesonthoseassets.The programwasconductedjointlybyTreasury,theFederalReserveandtheFDIC.LiketheTargeted InvestmentProgram,itwasdesignedforfinancialinstitutionswhosefailurecouldharmthefinancial systemandreducethepotentialforspillovertothebroaderfinancialsystemandeconomy.More specifically,theAssetGuaranteeProgramwasusedtohelpcertainfinancialinstitutionsfacinga potentiallossofmarketconfidencedueinlargeparttotheirholdingsofdistressedorilliquidassets.By helpingtolimittheinstitutionsexposuretolossesonilliquidordistressedassets,theAssetGuarantee Programhelpedtheinstitutionmaintaintheconfidenceofdepositorsandotherfundingsourcesand continuetomeetthecreditneedsofhouseholdsandbusinesses.TheAGPwasusedinalimitedfashion toassistBankofAmericaandCitigroupinconjunctionwiththeTargetedInvestmentProgram investmentsinthoseinstitutions. a. BankofAmerica InJanuary2009,Treasury,theFederalReserveandtheFDICagreedinprincipletosharepotentiallosses ona$118billionpooloffinancialinstrumentsownedbyBankofAmerica,consistingofsecuritiesbacked byresidentialandcommercialrealestateloansandcorporatedebtandderivativetransactionsthat referencesuchsecurities,loansandassociatedhedges.Ifthearrangementhadbeenfinalized,Treasury andtheFDICwouldhavereceivedpreferredstockandwarrantsasapremiumfortheguarantee.The announcementofthetransaction(andtheCitigrouptransactiondiscussedbelow)waswidelywelcomed bythemarketsandcontributedimmediatelytohelpingrestoreinvestorconfidenceinthefinancial institutionandthebankingsystemgenerally.InMay2009,beforethetransactionwasfinalized,Bankof Americaannounceditsintentiontoterminatenegotiationswithrespecttothelosssharingarrangement andinSeptember2009,thegovernmentandBankofAmericaenteredintoaterminationagreement. BankofAmericaagreedtopayaterminationfeeof$425milliontothegovernment,$276millionof whichwenttoTreasury.ThefeecompensatedthegovernmentforthevaluethatBankofAmericahad receivedfromtheannouncementofthegovernmentswillingnesstoguaranteeandsharelossesonthe poolofassetsfromandafterthedateofthetermsheet.Theterminationfeewasdeterminedby referencetothefeesthatwouldhavebeenpayablehadtheguaranteebeenfinalized.Noclaimsforloss paymentsweremadetothegovernment,norwereanyTARPorotherfundsspent.Thus,thefeeisa netgaintothetaxpayer. b. Citigroup InJanuary2009,Treasury,theFederalReserveandtheFDICsimilarlyagreedtosharepotentiallosseson a$301billionpoolofCitigroupscoveredassets.Thearrangementwasfinalizedand,asapremiumfor theguarantee,TreasuryandtheFDICreceived$7.1billionofpreferredstock,withtermsthatwere similartothoseintheTIPinvestmentandmoreonerousthanintheCPP,includingadividendrateof eightpercent.Treasuryalsoreceivedwarrantstopurchase66.5millionsharesofcommonstock. Althoughtheguaranteewasoriginallydesignedtobeinplaceforfivetotenyears,Citigrouprequested thatitbeterminatedinDecember2009inconjunctionwithCitigroupsrepaymentofthe$20billionTIP investment.ThiswasbecauseCitigroupsfinancialconditionhadimprovedandthebankraisedover $20billionofprivatecapital.Thebankingregulatorsapprovedthisrequest.
Inconnectionwiththetermination,TreasuryandtheFDICkeptmostofthepremiumpaid.Thatis,the governmentretainedatotalof$5.3billionofthe$7.1billionofpreferredstock(whichhadsincebeen convertedtotrustpreferredsecurities).Ofthisamount,Treasuryretained$2.23billion,andtheFDIC andTreasuryagreedthat,subjecttocertainconditions,theFDICwouldtransferupto$800millionof trustpreferredsecuritiestoTreasuryatthecloseofCitigroupsparticipationintheFDICsTemporary LiquidityGuaranteeProgram. FortheperiodthattheCitigroupassetguaranteewasoutstandingpriortoterminationinDecember 2009,Citigroupmadenoclaimsforlosspaymentstothegovernment,andconsequentlyTreasurymade noguaranteepaymentsofTARPfundstoCitigroup.Thus,allpaymentsreceivedtodate,andthe incomereceivedfromthesaleofthesecuritiesdescribedabove,willconstituteanetgaintothe taxpayer.AsofSeptember30,2010,totaldividendsreceivedfromthesecuritieswereapproximately $440million.OnSeptember30,2010,Treasurysoldthetrustpreferredsecuritiesforproceedsof approximately$2.25billion.TreasurystillholdsitsCitigroupwarrantsandexpectstoreceiveanother $800millionintrustpreferredsecuritiesfromtheFDIC,bothofwhichshouldprovidethetaxpayerwith anadditionalgain. 2. StatusasofSeptember2010 TheAssetGuaranteeProgramisnowclosed.Nopaymentsweremade.ThefeefromBankofAmerica, andsecuritiesanddividendsreceivedfromCitigroup,willresultinapositivereturnfortaxpayers.
E. WarrantDispositions 1. ProgramandGoals AsrequiredbyEESA,TreasuryreceivedwarrantsfromTARPbankstoprovidetaxpayerswithan additionalreturnonthegovernmentsinvestment.ForeachCPPandTIPinvestmentinapubliclytraded company,Treasuryreceivedwarrantstopurchase,atafixedexerciseprice,sharesofcommonstock equalto15percentoftheaggregateliquidationpreferenceoftheseniorpreferredinvestment.Theper shareexercisepricewassetatthe20tradingdaytrailingaverageofthebankscommonstockpriceas ofthetimeitwasgivenpreliminaryapprovalfortheTARPinvestment. Thewarrantsmaybeexercisedatanytimeoveratenyearperiod.Thesepublicwarrantsinclude certaincustomaryantidilutionprovisionstoprotecttheirvaluetoTreasuryintheeventthecompany issuesmorestockortakescertainotheractions.ForCPPinvestmentsinaprivatelyheldcompany,anS corporation,orcertainmutualinstitutions,Treasuryreceivedwarrantstopurchase,atanominalcost, additionalpreferredstock(thesesecuritiesarereferredtoaswarrantpreferreds)orsubordinated debentures(thesesecuritiesarereferredtoaswarrantsubdebt)equivalenttofivepercentofthe aggregateliquidationpreferenceoftheprimaryCPPinvestment.Thesewarrantpreferredsandwarrant subdebtsecuritiespayahigherdividendorinterestratethantheprimaryCPPinvestment.Treasury immediatelyexercisedthesekindsofwarrantsattheclosingsoftheinvestments. UponrepayingitsTARPpreferredstockinvestment,afinancialinstitutionmayrepurchaseitswarrants atanagreeduponfairmarketvalue.Inallcases,Treasuryfollowsaconsistentevaluationprocessto ensurethattaxpayersreceivefairmarketvaluesforthewarrants.Ifaninstitutiondecidesnotto repurchaseitswarrants,Treasuryhasthecontractualrighttosellthewarrants.Treasuryhasfolloweda policyofdisposingofwarrantsassoonaspracticableifnoagreementisreachedonarepurchase.Thus far,TreasuryhasutilizedamodifiedDutchpublicauctionmethodologytodisposeofwarrantsthatare notrepurchasedbythebank. 2. StatusasofSeptember2010 Todate,thedispositionofwarrantshassucceededinsignificantlyincreasingtaxpayerreturnsonthe CapitalPurchaseProgramandTargetedInvestmentProgrampreferredinvestmentsthathavebeen repaid.AsofSeptember30,2010,Treasuryhasreceivedmorethan$8billioningrossproceedsfrom thedispositionofwarrantsassociatedwith58CPPinvestmentsandone(1)TIPinvestment,consistingof approximately(i)$3billionfromissuerrepurchasesatagreeduponfairmarketvaluesand(ii)$5billion fromauctions.Intheauctions,clearingpriceshavebeensetthroughrobustcompetitionamonglarge numbersofbidders.Forthoseinvestments,whichrepresentapproximately$140billionincapital, Treasuryhasreceivedanabsolutereturnof4.2percentfromdividendsandanadded5percentreturn fromthesaleofthewarrantsforatotalabsolutereturnof9.2percent.Forthe$20billionTIP investmentinBankofAmericaCorporation,Treasuryreceivedaninternalrateofreturnof15.3percent. ThesereturnsarenotpredictiveoftheeventualreturnsontheentireCPPandTIPportfolios. TreasuryhasreleasedtwosemiannualWarrantDispositionReportsthatprovideadditionalinformation regardingthedispositionprocessandtheresultsofthewarrantsales.Thereportscanbefoundonour websiteatwww.FinancialStability.gov/latest/reportsanddocs.html.
F. CommunityDevelopmentCapitalInitiative Communitiesunderservedbytraditionalbanksandfinancialservicesprovidershavefounditmore difficulttoobtaincreditinthecurrenteconomicenvironment.CommunityDevelopmentFinancial Institutions(CDFIs)existtoprovidefinancingtothesecommunities.CDFIsofferawiderangeof traditionalandinnovativefinancialproductsandservicesdesignedtohelptheircustomersaccessthe financialsystem,buildwealthandimprovetheirlivesandthecommunitiesinwhichtheylive.In particular,CDFIsfocusonprovidingfinancialservicestolowandmoderateincome,minority,andother underservedcommunities.CDFIsarecertifiedbyTreasurysCDFIFund,whichwascreatedforthe purposeofpromotingeconomicrevitalizationandcommunitydevelopmentinlowincome communities. 1. ProgramandGoals MostCDFIshavebeenadverselyaffectedbythefinancialcrisis.TreasurylaunchedtheCommunity DevelopmentCapitalInitiativetohelpviablecertifiedCDFIsandthecommunitiestheyservecopewith effectsofthefinancialcrisis. Underthisprogram,CDFIbanksandthriftsreceivedinvestmentsofcapitalwithaninitialdividendor interestrateof2percent,comparedtothe5percentrateofferedundertheCapitalPurchaseProgram. CDFIbanksandthriftsappliedtoreceivecapitalupto5percentofriskweightedassets.Toencourage repaymentwhilerecognizingtheuniquecircumstancesfacingCDFIs,thedividendratewillincreaseto9 percentaftereightyears,comparedtofiveyearsunderCPP. CDFIcreditunionscouldalsoapplytoreceivesecondarycapitalinvestmentsatratesequivalenttothose offeredtoCDFIbanksandthriftsandwithsimilarterms.Theseinstitutionscouldapplyforupto3.5 percentoftotalassets,whichisanamountapproximatelyequivalenttothe5percentofriskweighted assetsavailabletobanksandthrifts. TreasuryestablishedaprocessforreviewingCDCIapplicationsthatreliedontheappropriatefederal regulators,similartothatdescribedunderCPPRoleofbankregulatorsabove.Forthisprogram, viabilitywasdeterminedbytheCDFIsfederalregulatoronaproformabasis.Thatis,proformaviability tookintoaccountadditionalcapitalinjectionsfromprivateinvestorsmadepriorto,orconcurrently with,Treasurysinvestment.CDFIswerenotrequiredtoissuewarrantsunderthisprogram.Inaddition, CDFIsthatparticipatedinCPPandwereingoodstandingcouldexchangesecuritiesissuedunderCPPfor securitiesunderthisprogram. 2. StatusasofSeptember2010 TreasurycompletedfundingunderthisprograminSeptember2010.Thetotalinvestmentamountfor theCDCIprogramunderTARPisapproximately$570millionfor84institutions.Ofthisamount, approximately$363.3millionfrom28bankswasexchangedfrominvestmentsundertheCapital PurchaseProgramintotheCDCI.
5.TARPInvestmentProgramDescriptions
.. ProgramsDesignedtoUnlockCreditforSmallBusinessesandConsumers Creditwasextremelyconstrainedforsmallbusinessesandconsumersduringthefinancialcrisis. Availabilityofcreditiscriticalforsmallbusinessestogrowandforconsumerstomakehome improvements,buyanewcar,orsendtheirchildrentocollege.Recognizingthevitalimportancethat smallbusinessesandconsumershavefortheoveralleconomy,Treasurylaunchedthreeprogramsto addressthecreditconstraintsfacedbythesegroups:theTermAssetBackedSecuritiesLoanFacility (TALF),thePublicPrivateInvestmentProgram(PPIP)andtheSBA7(a)SecuritiesPurchaseProgram. Althoughthespecificgoalsandimplementationmethodsofeachprogramdiffered,theoverallgoalof thesethreeprogramswasthesametorestarttheflowofcredittomeetthecriticalneedsofsmall businessesandconsumers. G. TermAssetBackedSecuritiesLoanFacility TheTermAssetBackedSecuritiesLoanFacilityisakeypartoftheObamaAdministrationsFinancial StabilityPlanandthemajorinitiativeundertheTARPsConsumerandBusinessLendingInitiative(CBLI). TALFisajointFederalReserveTreasuryprogramthatwasdesignedtorestarttheassetbacked securitizationmarketsthathadgroundtoavirtualstandstillduringtheearlymonthsofthisfinancial crisis.TheABSmarketshistoricallyhavehelpedtofundasubstantialshareofcredittoconsumersand businesses.Theeffectsofthisissuancestandstillweremany:limitedavailabilityofcredittohouseholds andbusinessesofallsizes,anunprecedentedwideningofinterestratespreads,sharplycontracting liquidityinthecapitalmarketsandapotentialtofurtherweakenU.S.economicactivity. 1. ProgramandGoals a. Programdesign PursuanttoitsFederalReserveActSection13(3)authority,theFederalReserveBankofNewYork (FRBNY)agreedtoextendupto$200billioninnonrecourseloanstoborrowerstoenablethepurchase ofAAAratedassetbackedsecurities(ABS),includingthosebackedbyconsumerloans,studentloans, smallbusinessloans,andcommercialrealestateloans.Inreturn,theborrowerspledgedtheeligible collateralassecurityfortheloans,includingtheamountoftheequityhaircutprovidedbythe individualborrower.ShouldaborrowerdefaultuponitsTALFloanorvoluntarilysurrenderthe collateral,thecollateralwouldbeseizedandsoldtoTALFLLC,aspecialpurposevehiclecreatedby FRBNYtopurchaseandholdseizedorsurrenderedcollateral. TreasurysroleinTALFistoprovidecreditprotectionfortheprogramthroughthepurchaseof subordinateddebtinTALFLLC.Thefundswouldbeusedtopurchasetheunderlyingcollateral associatedwithTALFloansintheeventtheborrowersurrenderedthecollateralordefaulteduponits loan.Treasuryoriginallycommittedtopurchase$20billioninsubordinateddebtfromTALFLLC,or10 percentofthemaximumamountofloansthatcouldbeissued.Thiscommitmentwaslaterreducedto $4.3billionaftertheprogramclosedtonewlendinginJune2010with$43billioninloansoutstanding, sothatthecommitmentremainedat10percentoftheoutstandingloans. AlthoughTALFwasdesignedtoprovideupto$200billioninloanssecuredbyeligiblecollateral,the positiveeffectsofTALFonliquidityandinterestratespreadsresultingfromtheannouncementofTALF madeutilizationofthefullamountunnecessary.AsTALFpositivelyimpactedthemarketforasset backedsecurities,investorsbecameabletoaccesscheaperfundsintherestartedcapitalmarkets.The programwasatfirstextendedpasttheoriginalterminationdateofDecember2009toMarch2010,for
.. nonmortgagebackedABSandlegacyCMBScollateral,andtoJune2010,fornewlyissuedCMBS collateral.Giventheimprovementsinthemarkets,byprogramclosetheFRBNYhadapproximately$70 billioninloansunderTALF.Ofthatamount,$33billion(or47percent)inTALFloansremained outstandingasofSeptember8,2010. Figure5B:TotalConsumerABSIssuanceduringTALF
25
20
18.5 18.2 TALF Issuance
15
Non-TALF Issuance
16.5 16.8
10
8.2 8.1 8.3 2.9
6.0 13.6 12.6 6.6 9.1 0.4 0.5 1.9 1.3 1.6 2.0 5.2 1.2 5.8 2.0 0.1 6.6 4.4 4.3 3.8 0.3 1.5 4.2 7.4 3.9 0.5 7.2
3.6
Source:FRBNY TALFSubscriptionReport
b. Protectionoftaxpayerinterests TALFwasdesignedtoprovideborrowerswithtermloansofuptofiveyearsagainsthighlyrated securities,whichareforfeitedintheeventaloanisnotrepaid.TALFemploysanumberofother safeguardstoprotecttaxpayersinterestsincludingthefollowing: TALFborrowersbearthefirstlossriskinallsecuritiespledgedascollateralforTALFloans duetothesubstantialhaircuts(setbyreferencetoborrowersequityinthesecurities) requiredofthoseborrowers.Haircutsrangedfrom5percentto20percentbasedonasset qualitytherebyfurtherlimitingrisk. EligiblesecuritiesmusthavereceivedtwoAAAratingsfromthemajorratingagencies,and noneofthemajorratingagenciescanhaveratedthesecuritybelowAAAorplacedthe securityonwatchforadowngrade. ProtectionisprovidedbytheriskpremiumincludedintheTALFloanrates.Theinterestrate spreadprovidesaccumulatedexcessinterestinTALFLLCasafirstlossposition.The availableexcessspreadtofundforfeitedloansis$476millionasofAugust2010.
.. EachABSissuermustengageanexternalauditortoofferanopinionthatsupports managementsassertionthattheABSisTALFeligible.Furtherprotectionisprovidedby FRBNYandtheircollateralmonitorsthatassesstheriskassociatedwithABSandCMBS collateralandperformduediligence.
2. StatusasofSeptember2010 TALFiswidelycreditedforachievingitspurposeofencouraginglendingtoconsumersandbusinesses whileoperatingunderaconservativestructurethatprotectstaxpayerinterests.Thefacilityhasceased makingnewloansasnotedabove.Byimprovingcreditmarketfunctioningandaddingliquiditytothe system,TALFhasprovidedcriticalsupporttothefinancialsystem.Thishasallowedlenderstomeetthe creditneedsofconsumersandsmallbusinesses,andhasstrengthenedtheoveralleconomy. Specifically,TALFachieveditsobjectivesofincreasingcreditavailabilityandliquidityinthesecuritization marketsandreducinginterestratespreads.Secondaryspreadsnarrowedsignificantlyacrossalleligible assetclassesby60percentormore.Forinstance,spreadsonAAAratedautoreceivablesfellsharply fromapeakof600basispointsinthefourthquarterof2008to21basispointsovertheirbenchmarks today.SpreadsinthesecondarymarketforCMBShavedeclinedfrom1500basispointsoverits benchmarkto210basispointsasofSeptember16,2010. Moreover,theimprovementsinthesecondarycreditmarketcontributedtotherestartofthenew issuemarket.AccordingtotheFederalReserveBankofNewYork,issuanceofnonmortgageasset backedsecuritiesjumpedto$35billioninthefirstthreemonthsofTALFlendingin2009,afterhaving slowedtolessthan$1billionpermonthinlate2008.6 InNovember2009,TALFfundsalsofacilitatedthefirstissuanceofcommercialmortgagebacked securitiessinceJune2008.Thishelpedreopenthemarketforsuchsecurities.Followingthatdeal, therehavebeenadditionalcommercialmortgagebackeddealsfundedwithoutassistancefromTALF. Astheliquiditypremiumonsecuritizedcredithasdecreasedandcreditconditionshaveimproved,TALF hasbecomealessattractivesourceoffinancing.ThecostoffundsforborrowerswhoutilizedtheTALF hasinmanycasesbecomemoreexpensivethanthecostoffundsintheprivatesector.Thisisreflected inthehighamountofborrowerprepaymentswhichhavetotaled$35.3billiononethirdofaggregate TALFloansinspiteofthelongermaturitythreeandfiveyeartermsofTALFloans.Ifthesetrends continue,andprepaymentscontinue,thismayleadtoanearlierthanoriginallyexpectedexitfromthe program. ThematuritydateontheTreasuryloantotheTALFLLCisMarch2019.Treasurysengagementmay extendbeyondthisperiodifcollateralissoldtoTALFLLCwhichwillrequireactivemanagementofthe assets.Todate,theTALFprogramhasexperiencednolossesandalloutstandingTALFloansarewell collateralized.TreasuryandFRBNYcontinuetoseeitashighlylikelythattheaccumulatedexcess interestspreadwillcoveranyloanlossesthatmayoccurwithoutrecoursetothededicatedTARPfunds. Therefore,Treasurydoesnotexpectanycosttothetaxpayersfromthisprogram.
6
ReflectionsontheTALFandtheFederalReserve'sRoleasLiquidityProvider; http://www.newyorkfed.org/markets/talf.html.
.. H. PublicPrivateInvestmentProgram TheLegacySecuritiesPublicPrivateInvestmentProgram(PPIP),anotherkeycomponentoftheFinancial StabilityPlan,wasdesignedtopurchasetroubledlegacysecurities(i.e.,nonagencyresidential mortgagebackedsecurities(RMBS)andcommercialmortgagebackedsecurities(CMBS))thatwere centraltotheproblemsfacingtheU.S.financialsystem,andtherebyhelpensurethatcreditisavailable tohouseholdsandbusinessesandultimatelydrivetheU.S.towardeconomicrecovery. 1. ProgramGoalsandDesign a. TheGoal:Unlockcreditmarketsforlegacysecuritiestoallowfinancialinstitutionsto repairtheirbalancesheetsandextendnewcredit Duringthecrisis,manyfinancialinstitutionsandinvestorswereunderextremepressuretoreduce indebtedness.Thisdeleveragingprocesspusheddownthemarketpricesformanyfinancialassets, includingtroubledlegacyRMBSandCMBS,belowtheirfundamentalvalue.Institutionsandinvestors weretrappedwithhardtovalueassets,markedatdistressedpricesontheirbalancesheets,which constrainedliquidityandtheavailabilityofcreditinthesemarkets. ThepurposeofPPIPwastodrawnewprivatecapitalintothemarketforlegacyRMBSandCMBSby providingfinancingonattractivetermsaswellasamatchingequityinvestmentmadebytheTreasury Department.Byprovidingthisfinancing,PPIPwasdesignedtohelprestartthemarketforthese securities,therebyhelpingfinancialinstitutionsbegintoremovetheseassetsfromtheirbalancesheets andallowingforageneralincreaseincreditavailabilitytoconsumersandsmallbusinesses. ThekeyobjectivesofthePublicPrivateInvestmentPrograminclude: Supportmarketfunctioningbyactingasacatalysttobringprivatecapitalbacktothe marketforlegacyRMBSandCMBS; Facilitatepricediscoveryinthemarketsformortgagebackedsecurities,therebyreducing theuncertaintyregardingthevalueofsuchsecuritiesamongthebanksandotherfinancial institutionsholdingthemandenablingthesefinancialinstitutionstosellsuchassetsand raisenewprivatecapital; Restoreconfidenceinandcreateanenvironmentconducivetonewissuanceofnew credit;and Protecttaxpayerinterestsandgeneratereturnsthroughlongterminvestmentsineligible assetsbyfollowingpredominantlyabuyandholdstrategy. b. ProgramDesign Followingthecompletionoffundraising,Treasuryhascommittedapproximately$22billionofequity anddebtfinancingtoeightPublicPrivateInvestmentFunds(PPIFs).Thesefundswereestablishedby privatesectorfundmanagersforthepurposeofpurchasingeligibleRMBSandCMBSfromeligible financialinstitutionsunderEESA.ThisrepresentedareductionfromTreasurysinitialallocationof$30
.. billioninpotentialcapitalcommitments,becausetherewaslessaggregatedemandfromprivatesector investorsduetoimprovedmarketconditionsforlegacynonagencyRMBSandCMBS. 7 TheequitycapitalraisedfromprivateinvestorsbythePPIPfundmanagershasbeenmatchedby Treasury.Treasuryhasalsoprovideddebtfinancingupto100percentofthetotalequitycommittedto eachPPIF.PPIFshavetheabilitytoinvestineligibleassetsoverathreeyearinvestmentperiodfrom theirinitialclosing.Theythenhaveuptofiveadditionalyears,whichmaybeextendedforuptotwo moreyears,tomanagetheseinvestmentsandreturntheproceedstoTreasuryandtheotherPPIF investors.PPIPfundmanagersretaincontrolofassetselection,purchasing,trading,anddispositionof investments. TheprofitsgeneratedbyaPPIF,netofexpenses,willbedistributedtotheinvestors,includingTreasury, inproportiontotheirequitycapitalinvestments.TreasuryalsoreceiveswarrantsfromthePPIFs,which givesTreasurytherighttoreceiveapercentageoftheprofitsthatwouldotherwisebedistributedtothe privatepartnersthatareinexcessoftheircontributedcapital.Theprogramstructurespreadsrisk betweentheprivateinvestorsandTreasury,andprovidestaxpayerswiththeopportunityforsubstantial gain. ThefollowingfundmanagerscurrentlyparticipateinPPIP: AllianceBernstein,LPanditssubadvisorsGreenfieldPartners,LLCandRialtoCapital Management,LLC; Angelo,Gordon&Co.,L.P.andGECapitalRealEstate; BlackRock,Inc.; InvescoLtd.; MarathonAssetManagement,L.P.; OaktreeCapitalManagement,L.P.; RLJWesternAssetManagement,LP.;and WellingtonManagementCompany,LLP. Inaddition,PPIPfundmanagershaveestablishedmeaningfulpartnershiprolesforsmall,minority,and womenownedbusinesses.Theserolesinclude,amongothers,assetmanagement,capitalraising, brokerdealer,investmentsourcing,research,advisory,cashmanagementandfundadministration services.Collectively,PPIPfundmanagershaveestablishedrelationshipswithtenleadingsmall, minority,andwomenownedfirms,locatedinfivedifferentstates. 2. StatusasofSeptember2010 a. PPIFstatus ThePPIFshavecompletedfundraisingandclosedonapproximately$7.4billionofprivatesectorequity capital,whichwasmatched100percentbyTreasury,representing$14.7billionoftotalequitycapital. Treasuryalsocommittedtoprovide$14.7billionofdebtcapital,representing$29.4billionoftotal purchasingpowertotheprogram.AsofSeptember30,2010,PPIFshavedrawndownapproximately $18.6billionoftotalcapital(63percentoftotalpurchasingpower),whichhasbeeninvestedineligible
7
ThelegacysecuritiesPPIPwasannouncedinconjunctionwithalegacyloanPPIPtobeimplementedbythe FDIC.Thecombinedsizeofthebothprogramswasinitiallycontemplatedtobe$100billion.
.. assetsandcashequivalentspendinginvestment. 8 ThereductionofTreasurysmaximumcommitment from$30billionto$22billion,aftertheannouncementoftheprogramcontributedtoimprovedmarket conditions,allowedTreasurytoaccomplishitsobjectiveswithanefficientuseoftaxpayerfunds. b. Supportmarketfunctioning TheannouncementandsubsequentimplementationofPPIPwerekeystoreducingtheilliquidity discountembeddedintheselegacysecuritiesandtheuncertaintyassociatedwiththeirvalue,which createdanenvironmentconduciveforfinancialinstitutionstobegintradingandsellingtheirholdingsof suchassets.AccordingtotheNationalInformationCenter 9 ,thenonagencyRMBSandCMBSholdings ofthetop50bankholdingcompaniesholdingswere$237billionasofJune30,2010,approximately$47 billionor17percentlowerthanlevelsfromayearearlier.WebelievethatPPIPplayedaroleinhelping restartthemarketforsuchsecurities,therebyallowingbanksandotherfinancialinstitutionstobegin reducingtheirholdingsinsuchassetsatmorenormalizedprices. c. Facilitatepricediscovery SincetheannouncementofPPIPinMarch2009,pricesforrepresentativelegacysecuritieshave increasedbyasmuchas75percentforRMBSandCMBS.Asillustratedinthechartbelow 10 ,benchmark indicesforastandardizedbasketofsubprimenonagencyRMBSreferenceobligationsfromthe2006 vintage,originallyratedAAA,andastandardizedbasketofCMBSreferenceobligationsfromthe2007 vintage,originallyratedAAA,haveappreciatedbetween50percentand80percent.
ThenextPublicPrivateInvestmentProgramQuarterlyReport,availableat www.FinancialStability.gov/roadtostability/legacysecurities.html#reports,willhaveinformationthrough September30,2010. 9 TheNationalInformationCenterisarepositoryoffinancialdataandinstitutioncharacteristicscollectedbythe FederalReserveSystem. 10 TheABXisaliquid,tradabletooldevelopedbyMarkit,whichallowsinvestorstotakepositionsinastandardized basketofsubprimenonagencyRMBSreferenceobligationsviacreditdefaultswapcontracts.TheCMBXisa liquid,tradabletooldevelopedbyMarkit,whichallowsinvestorstotakepositionsinastandardizedbasketof CMBSreferenceobligationsviacreditdefaultswapcontracts.Suchindiceshavebecomewidelyusedbenchmarks fortheperformanceof(i)subprimenonagencyRMBSand(ii)CMBS,respectively.
.. Figure5C:
2006VINTAGE ABX&2007VINTAGE CMBXAAAPRICES

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7/08/09 Announcementof FundManagers 9/30/09 Initial PPIPClosings
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3/23/09 PPIP Announcement
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CMBX.4
ABX.06.2
%ChangeSince: PPIP Announcement Announcement ofPPIP FundManagers 55% 31% 91% 85% Initial PPIPClosings 16% 43%
CMBX.4 ABX.06.2
May10 Jun10
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d. ExtendingNewCredit
SincetheannouncementoftheprograminMarch2009,approximatelytennewCMBSandRMBS transactionshavebeenbroughttomarket,collectivelyrepresentingapproximately$5billioninnew issuancetodate.Althoughsmallerthantheannualissuancepriortothefinancialcrisis,webelievethat thesetransactions,particularlyinCMBS,representmeaningfulstepstowardnewcreditformationinthe marketplace. e. ReturnstoTaxpayers AlthoughthePPIFshavebeeninoperationforonlyashorttime,eachoftheeightPPIFshasgenerated positiveinvestmentreturnsforTreasury,withnetinternalratesofreturnsinceinceptionrangingfrom 13percentto37percentasofJune30,2010.ThePPIFshavegeneratedcumulativeunrealizedequity gainsinexcessoffundedcapitalcontributionsofmorethan$600millionasofJune30,2010toall investors(Treasuryandprivateinvestors).AsofSeptember30,2010,thePPIFsalsohavemade approximately$215millionofinterestanddividendpaymentsanddistributionstoTreasury.Because thePPIFsarestillintheearlystagesoftheirinvestmentlifecycles,itwouldbeprematuretodrawany meaningfullongtermconclusionsregardingtheperformanceofindividualPPIFsortheprogramin general.However,TreasuryhasbeenencouragedbytheperformanceofthePPIPfundmanagersto date.
.. f. PPIPGoingForward ThePPIFsarestillintheirfirstyearofinvesting,havingonlydrawnapproximately63percentoftheir potentialpurchasingpowerasofSeptember30,2010,andareexpectedtocontinuedeployingand reinvestingtheircapitalineligibleassetsthrough2012.Astimeprogresses,Treasuryanticipatesthat thePPIPfundmanagerswillcontinuetomakeprudentinvestmentdecisionsthatareconsistentwith theirlongterm,buyandholdstrategy,andthatthePPIFswillserveasastabilizingforceinthemarket.
.. I. SBA7(a)SecuritiesPurchaseProgram Smallbusinesseshaveplayedanimportantroleingeneratingnewjobsandgrowthinoureconomy. TheSmallBusinessAdministrations(SBA)7(a)LoanGuaranteeProgramassistsstartupandexisting smallbusinessesthatfacedifficultyinobtainingloansthroughtraditionallendingchannels.SBA7(a) loanshelpfinanceawidevarietyofbusinessneeds,includingworkingcapital,machinery,equipment, furnitureandfixtures. Theinitiativetounlockcreditforsmallbusinessincludedsupportfortheprimarymarket(i.e.loan origination)andsecondarymarketsupport(i.e.securitiesmarket).Theprimarymarketsupport,an initiativeseparatefromTARP,includedtemporarilyincreasingloanguaranteesfrom75percentto90 percentofanSBA7(a)loanbalance,aswellaseliminatingcertainloanoriginationfees.Theseactions, whichwerepartoftheRecoveryAct,madeiteasierforsmallbusinessestoobtainSBA7(a)loans. 1. ProgramandGoals Toensurethatcreditflowstoentrepreneursandsmallbusinessowners,Treasurytookmeasuresto complementtheObamaAdministrationsactionstohelpsmallbusinessesrecoverandgrow,includinga programtopurchaseSBAguaranteedsecurities(pooledcertificates).TreasurydevelopedtheSBA7(a) SecuritiesPurchaseProgramtopurchaseSBAguaranteedsecuritiesfrompoolassemblers.By purchasingintheopenmarket,Treasuryinjectedliquidityprovidingcashtopoolassemblersenabling thoseentitiestopurchaseadditionalloansfromloanoriginators.Inthismanner,Treasuryactedasa patientproviderofincrementalliquiditytofosterafluidsecondarymarket,whichinturnbenefitssmall businesslending. Thedesignandthelaunchoftheprogramexperienceddelaysduetothereluctanceofpoolassemblers (sellers)toparticipateintheprogram,citingconcernsaboutEESArestrictions,generalhesitancyindoing businesswiththegovernmentandTARPstigma.Notwithstandingtheseinitialhurdles,secondary marketpurchasesofSBA7(a)securitiesoriginatedonorafterJuly1,2008commencedinMarch2010. ThiscoincidedwiththeexpirationoftheABSportionoftheTALF,whichhadhelpedtofundSBA7(a) loans,alongwithcreditcard,automotiveandstudentloans,amongothers.TheSBA7(a)Securities PurchaseProgramextendedtheliquidityassistanceforthecreditmarketssupportingsmallbusiness loans.TheSBA7(a)secondarymarketsupportisintendedtocreateaneffective,fluidsecondary market,whichpromotesadditionallendingintheprimarymarketbyprovidingoriginatorsanavenueto selltheirissuancesandobtaincashforadditionallending,andthusimprovethecapitalinflowstofund smallbusinesses. SincethelaunchoftheprogramTreasuryhasconductedtransactionswithtwopoolassemblers.An externalassetmanagerpurchasestheSBA7(a)securitiesonbehalfofTreasurydirectlyfromthosepool assemblers(sellers)intheopenmarket.Treasuryutilizedindependentvaluationserviceprovidersto gainadditionalmarketinsightinordertomakeinformedpurchases. 2. StatusasofSeptember2010 TheSBA7(a)SecuritiesPurchaseProgramwasfocusedinscopeandappropriateinscalerelativetothe market.Currently,thereareapproximately$15billion11 SBA7(a)securitiesoutstanding,ofwhich$5
BasedondatafromSBA.govasofJuly31,2010.
11
.. billion 12 wereissuedonorafterJuly1,2008(theeligibleuniversefortheSBA7(a)SecuritiesPurchase Program).Themarkethasreceivedtheprogramwellbasedoncommentsfromthemarketparticipants andthefactthatsecondarymarketpriceshavestrengthened. SecuritiespurchasedbyTreasurycomprisedabout700loansrangingacrossapproximately17diverse industriesincluding:retail,foodservices,manufacturing,scientificandtechnicalservices,healthcare andeducationalservices.Theprogramhassupportedloansfrom39ofthe50statesinthecountry, indicatingabroadgeographicimpact. AsofSeptember30,2010,Treasuryhasconducted31transactionstotalingapproximately$357million. Theprogramceasedpurchasingsecuritiesinconjunctionwiththeexpirationofpurchaseauthority undertheAct.Treasurywillcontinuetomanageexistingpositions.
12
ColsonOnlineFactorDatabase,www.colsonservices.com
.. J. AutomotiveIndustryFinancingProgram(AIFP)
TheAutomotiveIndustryFinancingProgram(AIFP)wasbeguninDecember2008topreventasignificant disruptionoftheU.S.automotiveindustry,becausethepotentialforsuchadisruptionposedasystemic risktofinancialmarketstabilityandwouldhavehadanegativeeffectontheeconomy.In2008,the autoindustrylostnearly35percentofitssalesvolumeandalmost400,000jobs,andbothGMand Chryslerwereonthevergeofdisorderlyliquidations.Thiscouldhavecausedmillionsofadditionaljob losses. Recognizingthedanger,TreasuryextendedtemporaryloanstoGMandChryslerinDecember2008. AftertheObamaAdministrationtookoffice,itagreedtoprovideadditionalinvestmentsconditionedon eachcompanyanditsstakeholdersparticipatinginafundamentalrestructuring.Sacrificesweremade byunions,dealers,creditorsandotherstakeholders,andtherestructuringswereachievedthrough bankruptcycourtproceedingsinrecordtime.Asaresult,GMandChrysleraremorecompetitiveand viablecompanies,supportingAmericanjobsandtheeconomy.Operatingresultshaveimproved,the industryhasaddedjobs,andtheTARPinvestmentshavebeguntoberepaid. 1. ProgramsandGoals a. Automotivecompanies ShorttermfundingwasinitiallyprovidedtoGeneralMotors(GM)andChryslerontheconditionthat theydevelopplanstoachievelongtermviability.IncooperationwiththeObamaAdministration,GM andChryslerdevelopedsatisfactoryviabilityplansandsuccessfullyconductedsalesoftheirassetsto newentitiesinbankruptcyproceedings.Chryslercompleteditssaleprocessin42daysandGMin40 days.Treasuryprovidedadditionalassistanceduringtheseperiods. Intotal,Treasuryhasprovidedapproximately$80billioninloansandequityinvestmentstoGM,GMAC (nowknownasAllyFinancial),Chrysler,andChryslerFinancial.ThetermsofTreasurysassistance imposeanumberofrestrictionsincludingrigorousexecutivecompensationstandards,limitsonluxury expenditures,andothercorporategovernancerequirements. WhilesomehavequestionedwhyTARPwasusedtosupporttheautomotiveindustry,boththeBush andObamaAdministrationsdeterminedthatTreasurysinvestmentsintheautocompanieswere consistentwiththepurposeandspecificrequirementsofEESA.Amongotherthings,Treasury determinedthattheautocompanieswereandareinterrelatedwithentitiesextendingcreditto consumersanddealersbecauseoftheirfinancingsubsidiariesandotheroperations,andthata disruptionintheindustryoranuncontrolledliquidationwouldhavehadseriouseffectsonfinancial marketstability,employmentandtheeconomyasawhole. b. Supplierandwarrantysupportprograms IntherelatedAutoSupplierSupportProgram(ASSP),Treasuryprovidedloanstoensurethatauto suppliersreceivecompensationfortheirservicesandproducts,regardlessoftheconditionoftheauto companiesthatpurchasetheirproducts.IntheAutoWarrantyCommitmentProgram(AWCP), TreasuryprovidedloanstoprotectwarrantiesonnewvehiclespurchasedfromGMandChryslerduring theirrestructuringperiods.
.. Inearly2009,autosuppliersfacedtheriskofuncontrolledliquidationsacrossthesector.Fiftyfour(54) supplierrelatedbankruptciesoccurredin2009astheindustrywentthroughapainfulrestructuring. Today,inpartduetothesupportprovidedbyAutomotiveSupplierSupportProgram(ASSP),theauto supplybaseappearstohavestabilized.SuppliersarenowbreakingevenatalowerlevelofNorth Americanproduction. 13 2. GeneralMotors Treasuryprovided$50billionunderTARPtoGeneralMotors.ThisbeganinDecember2008,witha $13.4billionloanbytheBushAdministrationtoGeneralMotorsCorporation(GMorOldGM)tofund workingcapital.Undertheloanagreement,GMwasrequiredtosubmitaviablerestructuringplan.The firstplanGMsubmittedfailedtoestablishacrediblepathtoviability,andthedeadlinewasextendedto June2009forGMtodevelopanamendedplan.Treasuryloanedanadditional$6billiontofundGM duringthisperiod. Toachieveanorderlyrestructuring,GMfiledforbankruptcyonJune1,2009.Treasuryprovided$30.1 billionunderadebtorinpossessionfinancingagreementtoassistGMduringtherestructuring.Anewly formedentity,GeneralMotorsCompany(NewGM),purchasedmostoftheassetsofOldGMundera salepursuanttoSection363ofthebankruptcycode(363Sale).WhenthesaletoNewGMwas completedonJuly10,Treasuryconvertedmostofitsloansto60.8percentofthecommonequityinthe NewGMand$2.1billioninpreferredstock.Atthattime,Treasuryheld$6.7billioninoutstanding loans. Approximately$986millionremainedwithOldGM(nowknownasMotorsLiquidationCompany)for winddowncostsassociatedwithitsliquidation. a. Repayments NewGMhasrepaidthe$6.7billionloaninfull.(Therestoftheinvestmentisequitywhichwillbesold asdescribedbelow.)InDecember2009,NewGMbeganquarterlyrepaymentsof$1billionontheloan. InJanuary2010,NewGMandTreasuryamendedtheloanagreementtorequirecashthatNewGMheld inanescrowaccounttobeappliedtorepaytheloanbyJune30,2010.AfterNewGMrepaidTreasury $1billiononMarch31,2010,theoutstandingloanbalancefelltoapproximately$4.7billion,allofwhich wasrepaidonApril21,2010,fromtheescrowedfunds. b. Ownershipstructure NewGMcurrentlyhasthefollowingownership:Treasury(60.8percent),GMVoluntaryEmployee BenefitAssociation(VEBA)(17.5percent),theCanadianGovernment(11.7percent),andOldGMs unsecuredbondholders(10percent).Aspartoftherestructuring,GMissuedwarrantstoacquire additionalsharesofcommonstocktoVEBAandOldGM(fordistributiontothecreditorsofOldGM followingconfirmationofaplanofliquidationbythebankruptcycourt).
13
UBSInvestmentResearch,USAutoSupplierSurveyQ22010(July8,2010).
.. c. GeneralMotorsinitialpublicoffering TreasuryhasindicatedthemostlikelyexitstrategyfortheAIFPequityinvestmentsisagradualsale beginningwithaninitialpublicofferingofNewGM.InJune2010,Treasuryprovidedguidanceonits roleintheexplorationofanIPObyNewGM.Thefollowingareexcerptsfromthestatement: TheexacttimingofanIPOwillbedeterminedbyNewGMinlightofmarketconditionsand otherfactors. Theoverallsizeoftheofferingandrelativeamountsofprimaryandsecondaryshareswillbe determinedatalaterdate. TheselectionoftheleadunderwriterswasmadebyNewGM,subjecttoTreasurysagreement thattheselectionwasreasonable.Treasurywilldeterminethefeestobepaidtothe underwriters. InAugust2010,NewGMfiledaregistrationstatementonFormS1withtheU.S.Securitiesand ExchangeCommission(SEC)foraproposedIPOconsistingofcommonstocktobesoldbycertainofits stockholders,includingTreasury,andtheissuancebythecompanyofitsSeriesBmandatoryconvertible juniorpreferredstock.Treasurywillretaintheright,atalltimes,todecidewhetherandatwhatlevelto participateintheoffering. 3. Chrysler Treasuryhasprovidedatotalcommitmentofapproximately$14billiontoChryslerandChrysler Financialofwhichmorethan$12billionhasbeenutilized. InJanuary2009,Treasuryloaned$4billion toChryslerHolding(theparentofChryslerFinancialandOldChrysler).Undertheloanagreement, Chryslerwasrequiredtoimplementaviablerestructuringplan.InMarch2009,theAdministration determinedthatthebusinessplansubmittedbyChryslerfailedtodemonstrateviabilityandconcluded thatChryslerwasnotviableasastandalonecompany.PresidentObamasubsequentlylaidouta frameworkforChryslertoachieveviabilitybypartneringwiththeinternationalcarcompanyFiat.As partoftheplannedrestructuring,inApril2009,Chryslerfiledforbankruptcyprotection.InMay2009, Treasuryprovided$1.9billiontoChrysler(OldChrysler)underadebtorinpossessionfinancing agreementforassistanceduringitsbankruptcyproceeding. a. NewChrysler InJune2009,anewlyformedentity,ChryslerGroupLLC(NewChrysler),purchasedmostoftheassetsof OldChryslerundera363Sale.Treasuryprovideda$6.6billionloancommitmenttoNewChrysler,and receiveda9.9percentequityownershipinNewChrysler.Fiattransferredvaluabletechnologyto Chryslerand,afterextensiveconsultationwiththeObamaAdministration,committedtobuildingnew fuelefficientcarsandenginesinU.S.factories. TreasurysremaininginvestmentsinNewChryslerconsistof9.9percentofcommonequityanda$7.1 billionloan(includingundrawncommitmentsand$500millionassumedfromChryslerHolding).New Chryslercurrentlyhasthefollowingownership:ChryslerVoluntaryEmployeeBenefitAssociation(VEBA) (67.7percent),Fiat(20percent),Treasury(9.9percent),andtheGovernmentofCanada(2.5percent).
CorrectionmadeasofOctober7,2010.
.. b. OldChrysler InApril2010,thebankruptcycourtapprovedOldChryslersPlanofLiquidation.Asaresult,the$1.9 billiondebtorinpossessionloanprovidedtoOldChryslerinMay2009wasextinguishedandtheassets remainingwithOldChrysler,includingcollateralsecurityattachedtotheloan,weretransferredtoa liquidationtrust.Treasuryretainedtherighttorecovertheproceedsfromtheliquidationofthe specifiedcollateral,butdoesnotexpectasignificantrecoveryfromtheliquidationproceeds. c. SettlementwithChryslerHolding Theoriginal$4billionloanmadetoChryslerHoldinginJanuary2009wentintodefaultwhenOld Chryslerfiledforbankruptcy.InJuly2009,$500millionofthatloanwasassumedbyNewChrysler.In May2010,Treasuryacceptedasettlementpaymentof$1.9billionassatisfactioninfulloftheremaining debtobligationsassociatedwiththeoriginalloan.Thefinalrepayment,whilelessthanfacevalue,was significantlymorethanTreasuryhadpreviouslyestimatedtorecoverfollowingthebankruptcyand greaterthananindependentvaluationprovidedbyKeefe,BruyetteandWoods,Treasurysadviserfor thetransaction. d. ChryslerFinancial InJanuary2009,Treasuryannouncedthatitwouldlendupto$1.5billiontoaspecialpurposevehicle (SPV)createdbyChryslerFinancialtoenablethecompanytofinancethepurchaseofChryslervehicles byconsumers.InJuly2009,ChryslerFinancialfullyrepaidtheloan,includingtheadditionalnotesthat wereissuedtosatisfytheEESAwarrantrequirement,togetherwithinterest. 4. AllyFinancial(formerlyGMAC) Treasuryhasinvestedapproximately$17billioninAllyFinancial.Thisbeganwithaninvestmentbythe BushAdministrationof$5billioninDecember2008.Treasuryalsolent$884millionofTARPfundsto GM(oneofGMACsowners)forthepurchaseofadditionalownershipinterestsinarightsofferingby GMAC.InMay2009,federalbankingregulatorsrequiredGMACtoraiseadditionalcapitalbyNovember 2009inconnectionwiththeSCAP/stresstest.Treasuryexerciseditsoptiontoexchangetheloanwith GMfor35.4percentofcommonmembershipinterestsinGMAC.Treasuryalsopurchased$7.5billionof convertiblepreferredsharesfromGMAC,whichenabledGMACtopartiallymeettheSCAP requirements.AdditionalTreasuryinvestmentsinGMACwerecontemplatedtoenableGMACtosatisfy theSCAPrequirements.ThesewerecompletedinDecember2009,whenTreasuryinvestedan additional$3.8billioninGMAC.Today,Treasury'sinvestmentconsistsof56.3percentofthecommon stock,$11.4billionofmandatorilyconvertiblepreferredsecurities(whichmaybeconvertedinto commonstockatalaterdate)and$2.7billionoftrustpreferredsecurities. 5. StatusasofSeptember2010 a. Autosuppliersupportandwarrantycommitmentprogram Treasuryhasrecoveredallamountsinvestedunderthesupplierandwarrantyprograms.Withthe emergenceofNewGMandNewChryslerfrombankruptcyproceedingsandwiththethreatof liquidationgreatlyreduced,creditmarketaccessforsuppliersimproved.InJuly2009,Treasuryreduced thebasecommitmentunderthesuppliersupportprogramto$3.5billion.Asscheduled,theprogram closedinApril2010afterfullrepaymentofallloans,whichhadtotalednotmorethan$413million,with
.. interest.Thewarrantyprogramwasterminatedin2009,andthe$640millionadvancedunderthe programwasassumedand/orrepaidinthebankruptcysaletransactionsbyNewGMandNewChrysler. b. Outlookonautomotiveindustryfollowingrestructuringsandrepayments Today,thedomesticautoindustrycontinuestorecover.U.S.salesimprovedinthefirsthalfof2010 withannualizedautosalesrunningat11.1millionvehicles(comparedto9.6millioninthefirsthalfof 2009and10.4millionforthefullyearof2009).SincetheGMandChryslerbankruptciesconcludedlast year,U.S.autoindustryemploymenthasincreasedby62,100jobs. AstheoutlookforthedomesticautoindustryhasimprovedandtheestimatedvalueofTreasurys investmentshasincreased,theprojectedcostofAIFPhasdecreased(fromapproximately$28.2billion asofNovember2009,to$17billionasofAugust2010). GMrepaid$7billiontoTreasury,andiscurrentlypreparingforaninitialpublicofferinginwhich Treasurymayelecttosellshares.Inthefirstsixmonthsof2010,GMachievedtwoconsecutive quartersofpositiveoperatingprofitandnetincomeitsfirstquarterlyprofitssince2007. Likewise,aftertakingonetimechargeslastyearassociatedwithitsrestructuring,Chrysler postedtwoconsecutivequartersofoperatingprofit.WithrespecttoOldChrysler,Treasurywas repaid$1.9billion,whichwassignificantlymorethanTreasuryhadpreviouslyestimatedto recover. EachofAllyFinancialsfouroperatingbusinesseshasgeneratedaprofitsofarthisyear.
.. K. AmericanInternationalGroup,Inc.(AIG)InvestmentProgram WeactedbecausetheconsequencesofAIGfailingatthattime,inthosecircumstances, wouldhavebeencatastrophicforoureconomyandforAmericanfamiliesandbusinesses.
SecretaryGeithner,WrittenTestimonybeforetheHouseCommitteeonOversightandGovernment Reform(January27,2010),availableat:http://www.treas.gov/press/releases/tg514.htm.
InSeptemberof2008,panicinthefinancialsystemwasdeepandwidespread.FannieMaeandFreddie Macwereplacedintoconservatorship;LehmanBrothersfiledforbankruptcy;andMerrillLynchwas acquiredbyBankofAmericainalastminuterescue.Majorbanks,suchasWashingtonMutualand Wachovia,experienceddebilitatingdepositwithdrawals,eventuallycollapsed,andwereacquired. Moneymarketfundsalsosufferedabroadrun,threateningwhatwasconsideredoneofthesafest investmentsforAmericans.Thecommercialpapermarketwasalsodisrupted,threateningavitalsource offundingformanybusinesses.Nooneknewhowdeeplythemarketsandtheeconomywouldfall,and privatelendersmassivelyretrenchedrisk. Amidsttheseevents,onFriday,September12,AmericanInternationalGroup(AIG)officialsinformed theFederalReserveandTreasurythatthecompanywasfacingpotentiallyfatalliquidityproblems. AlthoughitwasneitherAIGsregulatornorsupervisor,theFederalReserveBankofNewYork(FRBNY) immediatelybroughttogetherateamofpeoplefromtheFederalReserve,theNewYorkStateInsurance Department,andotherexpertstoconsiderhowtorespondtoAIGsproblems.Congressgavethe FederalReserveauthoritytoprovideliquiditytothefinancialsystemintimesofseverestress,andit actedtofulfillthatresponsibility. Atthetime,AIGwasthelargestproviderofconventionalinsuranceintheworld,withapproximately75 millionindividualandcorporatecustomersinover130countries.AIGsassetsexceeded$1trillion.It wassignificantlylargerthanLehmanBrothers.Itinsured180,000businessesandotherentities employingover100millionpeopleintheU.S.Itwasalargeissuerofcommercialpaperandthesecond largestholderofU.S.municipalbonds.AIGsparentholdingcompany,whichwaslargelyunregulated, engagedinfinancialactivitiesthatstrayedwellbeyondthebusinessoflifeinsuranceandpropertyand casualtyinsurance.Itsfinancialproductsunitwasasignificantparticipantinsomeofthenewest, riskiest,andmostcomplexpartsofthefinancialsystem. InthechaoticenvironmentofSeptember2008,theFederalReserveandTreasuryconcludedthatAIGs failurecouldbecatastrophic.Amongotherthings,ifAIGhadfailed,thecrisiswouldhavealmost certainlyspreadtotheentireinsuranceindustry,anditsfailurewouldhavedirectlyaffectedthesavings ofmillionsofAmericansinwaysthatLehmansfailuredidnot.Therefore,thegovernmenttookaction toprotectthefinancialsystem. AIGneededadurablerestructuringofbothitsbalancesheetanditsbusinessoperations.Fallingasset pricesgeneratedsubstantiallossesonthecompanysbalancesheet.Theyalsoincreasedthepayments tocounterpartiesthatAIGwasrequiredtomakeunderthetermsofcreditprotectioncontractsithad sold.AIGsinsurancesubsidiariesexperiencedsignificantcashoutflowsrelatedtoasecuritieslending program,asthevalueofresidentialmortgagebackedsecuritiesthattheyhadpurchasedandloaned againstcashcollateralcontinuedtofall.
.. Thegovernmentfacedescalatingandunprecedentedchallengesonmanydifferentfrontsofthe financialcrisisduringSeptember,October,andNovember.Duringthattime,theFederalReserveand TreasurytookaseriesofstepstopreventAIGsdisorderlyfailureandmitigatesystemicrisks. 1. ProgramandGoals TheinitialassistancetoAIGwasprovidedbytheFRBNYbeforethepassageofEESAandthecreationof TARP.TheFRBNYprovidedloanstoAIGunderthesection13(3)authorityoftheFederalReserveActto lendonasecuredbasisunderunusualandexigentcircumstancestocompaniesthatarenot depositoryinstitutions: InSeptember2008,theFRBNYprovidedan$85billioncreditfacilitytoAIG,andreceived preferredshareswhichcurrentlyhaveapproximately79.8percentofthevotingrightsofAIGs commonstock(knownasSeriesC).TheFRBNYcreatedtheAIGCreditFacilityTrust(theTrust) toholdthesharesforthebenefitoftheU.S.TreasurybuttheDepartmentoftheTreasurydoes notcontroltheTrustandcannotdirectitstrustees. AfterTARPwasenacted,theTreasuryandtheFederalReservecontinuedtoworktogethertoaddress thechallengesposedbyAIG: InNovember2008,theFederalReserveandTreasuryjointlyannouncedapackageofactions designedtoaddressthecontinuingvulnerabilitiesinAIGsbalancesheetthatthreatenedits viabilityanditscreditratings.Treasuryinvested$40billioninseniorpreferredstockofAIG undertheauthorityrecentlygrantedbyEESA(thepreferredstockwassubsequently exchangedinApril2009,forfacevalueplusaccrueddividends,into$41.6billionofa differentseriesofpreferredstock),anditalsoreceivedwarrantstopurchasecommon sharesinthefirm.Thefundswereusedimmediatelytoreducetheloansprovidedbythe FRBNY.Aspartoftherestructuring,theFRBNYalsoagreedtolendupto$22.5billiontoa newlycreatedentity,MaidenLaneIILLC,tofundthepurchaseofresidentialmortgage backedsecuritiesfromthesecuritieslendingportfolioofseveralofAIGsregulatedU.S. insurancesubsidiaries,andupto$30billiontoasecondnewlycreatedentity,MaidenLane IIILLC,tofundthepurchaseofmultisectorcollateralizeddebtobligationsfromcertain counterpartiesofAIGFinancialProductsCorp.(AIGFP). InApril2009,Treasurycreatedanequitycapitalfacility,underwhichAIGmaydrawupto $29.8billionasneededinexchangeforissuingadditionalsharesofpreferredstockto Treasury.AsofSeptember30,2010,AIGhasdrawn$7.5billionfromthefacilityandthe remainderwillbeusedinconnectionwiththerestructuringplandiscussedbelow. InDecember2009,theFederalReservereceivedpreferredequityinterestsintwospecial purposevehicles(SPVs)formedtoholdtheoutstandingstockofAIGslargestforeign insurancesubsidiaries,AmericanInternationalAssuranceCompany(AIA)andAmericanLife InsuranceCompany(ALICO),inexchangefora$25billionreductioninthebalance outstandingandmaximumcreditavailableunderAIGsrevolvingcreditfacilitywiththe FRBNY.ThetransactionspositionedAIAandALICOforinitialpublicofferingsorsale.
.. 2. TheAIGRestructuringPlanandTaxpayerExit OnSeptember30,2010AIGannouncedthatithadenteredintoanagreementinprinciplewiththeU.S. DepartmentoftheTreasury,theFRBNY,andtheTrustdesignedtorepayallofthecompanys obligationstoAmericantaxpayers.TherestructuringplanwillacceleratethetimelineforAIGs repaymentofthegovernmentandwillputtaxpayersinaconsiderablystrongerpositiontorecouptheir investmentinthecompany.Atcurrentmarketpricesthevalueofthe1.655billionofsharesthat Treasurywillreceiveisapproximately$64.3billion, 14 versusthe$47.5billionthatTreasuryhasinvested inthecompanytodate. Thebasictermsoftherestructuringplanarestraightforwardinconcept:sellsufficientassetstopayoff AIGsobligationstotheFRBNY,streamlineAIGsbusinessportfolio,andrecapitalizeAIGsbalancesheet tosupportinvestmentgradestatuswithouttheneedforongoinggovernmentsupport. Morespecifically,theplanispremisedonthreekeysteps: a. RepayingandterminatingtheFRBNYCreditFacilitywithAIG Today,AIGowestheFRBNYapproximately$21billioninseniorsecureddebtundertheFRBNYcredit facility.Undertheplan,AIGwillrepaythisentireamountandterminatetheFRBNYseniorsecured creditfacility.Fundingforthiswillcomeprimarilyfromtheproceedsoftheinitialpublicofferingofthe companysAsianlifeinsurancebusiness(AIA)andthependingsaleofitsforeignlifeinsurancecompany (ALICO)toMetLife. b. FacilitatingtheorderlyexitoftheU.S.Governmentsinterestsintwospecialpurpose vehicles(SPVs)thatholdAIAandALICO Today,theFRBNYholdspreferredinterestsintwoAIGrelatedSPVstotalingapproximately$26billion. Undertheplan,AIGwillusetheremaining$22billionofTARPfundsavailabletoit(undertheSeriesF preferredstockfacilityprovidedinApril2009)andTreasurywillreceiveanequalamountoftheFRBNYs preferredinterestsintheSPVs.Overtime,AIGwillrepaytheFRBNYandtheTreasuryforthese preferredintereststhroughproceedsfromthesalesofAIGStarLifeInsuranceandAIGEdisonLife Insurance,themonetizationoftheremainingequitystakeinAIA,thesaleofMetLifeequitysecurities thatAIGwillownafterthecloseoftheALICOsale,andthemonetizationofcertainotherdesignated assets.TheaggregatevalueoftheassetsunderlyingthepreferredinterestsintheSPVssignificantly exceedstheliquidationpreferenceofthepreferredinterests.Treasurydoesnotanticipateincurringany lossfromitspurchaseoftheSPVpreferredinterests. c. RetiringAIGsremainingTARPsupport Todate,Treasuryhasinvestedapproximately$47.5billionofTARPfundsinAIG.Undertheplan, Treasuryisexpectedtoreceiveapproximately1.1billionsharesofAIGcommonstockinexchangeforits existingTARPinvestmentsinAIG,andanadditional563millionsharesofcommonstockfromthe exchangeoftheSeriesCpreferredsharesheldbytheTrust.Aftertheexchangeiscompleted,itis expectedthatTreasurywillsellitsstakeinAIGintothepublicmarketsovertime.
14
ThepriceofAIGcommonstock,asofFriday,October1,2010,was$38.86.
.. Theplanisstillsubjecttoanumberofconditions,andmuchworkremainstobedonetoclosethe transactions.Nevertheless,theplanreflectsthesubstantialprogressthatAIGandthegovernmenthave madeinrestructuringthecompanyandreducingthesystemicriskthatitonceposed.Theplanalso representsasignificantsteptowardsendingthegovernmentsroleinprovidingassistancetothe company. Overthepasttwoyears,thegovernmenthasworkedwithAIGtorecruitanewCEO,anewChiefRisk Officer,anewGeneralCounsel,anewChiefAdministrativeOfficer,andanalmostentirelynewBoardof Directors.Alloftheseexecutivesanddirectorsarecommittedtotheobjectiveofexecutingthe restructuringplanandpayingbacktaxpayersaspromptlyaspracticable.Inaddition,theprofitabilityof theAIGscorebusinessitsinsurancesubsidiarieshasbeensteadilyimproving,ashasthemarkets perceptionofthevalueofthesesubsidiaries.Theimprovementinthevalueofthesebusinessesand theirultimatesalearecentraltotheAIGrestructuringplan. Uponcompletionoftherestructuringplan,AIGwillbeasimplifiedlife,propertyandcasualtyinsurer withsolidlycapitalizedinsurancesubsidiaries,adequateliquidity,andastablebalancesheet.
Treasury Positions in AIG, post-Restructuring

Other TARP Funds Invested ($B) Common Equity Number of Shares (B) Value ($B) Preferred Interest In AIG SPVs ($B Treasury Net Value ($B) 1.092 $42.4 $22.3 ($5.1)
(2) (4)
(1)
Total Treasury $69.8
(Series C) -
$69.8
0.563 $21.9 $21.9
(3) (4)
$64.3 $22.3 $16.8
(5)
Note: This table shows only Treasury's investments in AIG and does not reflect FRBNY's loans to or interests in AIG. The restructuring plan provides for payment in full of the FRBNY Credit Facility. In addition, the value of the assets held by Maiden Lane II and Maiden Lane III currently exceeds the amounts of the FRBNY loans to those entities, and it is expected that each of those loans will be paid in full.
(1) Treasury holds investments in AIG in two forms: equity investments made through TARP and equity provided to the AIG Credit Facility Trust for Treasury's benefit and in connection with the Federal Reserve's creation of the FRBNY Credit Facility in September 2008. (2) (3)
After the proposed restructuring of AIG TARP will hold 1.092 billion shares of AIG common stock.
After the proposed restructuring of AIG Treasury will receive 563 million shares of AIG common in connection with the wind-down of the AIG Credit Facility Trust.
(4) (5)
Common equity is valued at the market closing price on October 1, 2010 of $38.86 per share.
After the proposed restructuring of AIG, TARP will hold up to $22.3 billion of preferred interests in two AIG-related SPVs. The estimated aggregate value of the assets underlying the preferred interests in the SPVs significantly exceeds the liquidation preference of the TARP preferred interests. Therefore, Treasury does not anticipate incurring any loss from its purchase of the SPV preferred in connection with the AIG restructuring. For further details see the 8-K filed by AIG with the SEC on September 30, 2010.
.. 3. ProtectingtheTaxpayer SincetherescueofAIG,therehavebeenanumberofcriticismsleveledattheactionsthegovernment tookandthedecisionmakingprocessthatresultedinthoseactions.RepresentativesofTreasury,the FederalReserveBoard,andtheFRBNYhavetestifiedonseveraloccasionsabouttheactionsthatthe governmenttookandhaveprovidedwrittenresponsesforthepublicrecord. 15 Thatrecordshouldbe readbyanyonewhowantstoobtainafullunderstandingofthegovernmentsactions.Inthisreport, wesummarizesomeoftheissuesthathavebeenraisedinthatpublicdiscussion.Wefocusonthreekey questionsthathavebeenasked: ShouldAIGhavebeenallowedtofailandgobankrupt? a. ShouldAIGhavebeenallowedtofailandgobankrupt? SomeobservershavearguedthatAIGshouldhavebeenlefttofailandfileforbankruptcy.However,by virtueofboththesizeofitsbalancesheetandthenatureofitsliabilities,anAIGbankruptcyin Septemberof2008wouldhavebeencatastrophictoglobalfinancialandinsurancemarkets.AIGwas oneofthelargestlifeinsurersintheUnitedStates.AIGsfailurewouldhavedirectlythreatenedthe savingsofmillionsofAmericans.AIGhadprovidedfinancialprotectiontomunicipalities,pensionfunds, andotherpublicandprivateentitiesthroughguaranteedinvestmentcontractsandproductsthat protectparticipantsin401(k)retirementplans.DoubtsaboutthevalueofAIGlifeinsuranceproducts couldhavegenerateddoubtsaboutsimilarproductsprovidedbyotherlifeinsurancecompanies,and openedanentirelynewchannelofcontagionandpanic. Inaddition,uponthefilingofabankruptcypetitionbyAIG,holdersofhundredsofbillionsofdollarsof financialassetsinsuredbyAIGFPwouldhavebeenentitledto:(i)immediatelyterminatetheir insurancecontractswithAIG,(ii)applythecollateralAIGhadpreviouslypostedwiththemtotheir terminationclaimsagainstAIG,and(iii)offsetremainingcontractualclaimstheyhadagainstAIGagainst anyotherobligationtheymightoweAIGonanyotherqualifiedfinancialcontract.Theconsequencesof thisrapidunwindingofAIGscreditinsurancewouldhavebeensevere.HavinglostthebenefitofAIGs insuranceorwraponhundredsofbillionsofdollarsofcreditinstruments,AIGscounterpartieswould havesoughttoreplacetheinsuranceifitwereavailable,or(becausesuchinsurancewaslargely unavailableinSeptemberof2008)toselltheunderlyingcreditinstrumentssoastomitigatefuture losses.
15
WereallotheroptionsexhaustedbeforeassistancewasprovidedtoAIG? WerethepaymentsmadebyAIGtoitsderivativecounterpartiesappropriate?
See,forexample,SecretaryGeithnersTestimonybeforetheHouseCommitteeonOversightandGovernment Reform(January27,2010),availableat:http://www.treas.gov/press/releases/tg514.htm;WrittenTestimonyof JimMillstein,ChiefRestructuringOfficer,U.S.DepartmentoftheTreasury,beforetheCongressionalOversight Panel(May26,2010),availableat:http://cop.senate.gov/documents/testimony052610millstein.pdf;Federal ReserveBoardChairmanBenS.BernankesTestimonybeforetheHouseCommitteeonFinancialServices(March 24,2009),availableat:http://www.federalreserve.gov/newsevents/testimony/bernanke20090324a.htm;ScottG. AlvarezsTestimonybeforetheCongressionalOversightPanel(May26,2010),availableat: http://www.federalreserve.gov/newsevents/testimony/alvarez20100526a.htm;andThomasC.BaxtersTestimony beforetheHouseCommitteeonOversightandReform(January27,2010),availableat: http://www.newyorkfed.org/newsevents/speeches/2010/bax100127.html.
.. Thewidespreadsaleofhundredsofbillionsofdollarsofaconcentratedclassoffinancialassetswould havecreatedsignificantadditionaldownwardsellingpressureonfinancialassets,amplifyingtheselling panicthathadalreadystartedfollowingtheLehmanbankruptcy.Ofequalconcern,thedefaultbyAIG andAIGFPonmorethan$100billionofinstitutionalindebtedness,including$15billionofcommercial paperand$85billionofshorttermrepurchaseobligations,wouldhaveexacerbatedthestressesinthe moneymarketandrepomarkets. ThisdamageofAIGscollapsewouldhaverapidlyspreadbeyondWallStreet.Borrowingcostsforall businesseswouldhaveincreasedseverely,thevalueofpensionfundswouldhavefallenevenmore sharply,andjoblosseswouldhaveskyrocketed.WhilethedecisiontosaveAIGwasnotaneasyone,it wasabetterchoicefortheAmericanpeoplethanfacingthecatastrophicrisksoflettingitfailgiventhe stateofthefinancialsystematthetime. b. Wereallotheroptionsexhausted? Somehavesuggestedthatthegovernmentshouldhavepursuedotheroptionsmoreaggressively,such asarescuebyprivatefirmsorahybridoptioninvolvingbothpublicandprivateassistance.However, noonehasidentifiedaparticularprivateorpublicprivatehybridsolutionthatcouldhavebeen achievedinthecircumstances,orevenapotentialspecificonethatshouldhavebeenexplored.Others havesuggestedthataprepackagedbankruptcymighthavebeenpossible,eventhoughtherewasno legaltoolavailabletomanagetheorderlywinddownofthecompany.Inparticular,thegovernmentdid nothavetheabilitytoquicklyseparatethestable,underlyinginsurancebusinessesfromthecomplex anddangerousfinancialactivitiescarriedoutprimarilybyAIGFP. 1) Privateorahybridprivatepublicrescue ThebasicfactisthatAIGneededover$60billioninSeptember2008toavoidfailure.Noprivatefirm waswillingtoprovideit,despitetheeffortsofAIGandthegovernmenttosecuresupport.AIGhad alreadyreachedouttotheprivatesectorforfundingbutwasunabletofindcompanieswillingtolendit theamountthatitneededtoavoidbankruptcy.Thegovernmentalsoworkedtofacilitateaprivate solution.Aseriesofmajorinvestorsconsideredtakingactionandrefusedtodoso,includingWarren Buffett,twoofthelargestbanks,andsomeofthelargestprivateequityfirmsintheworld. AtthetimeAIGneededassistance,bankswereshrinkingcreditandwerereluctanttolendeventoone another.Largeprivateinvestorswerehoardingcash.Inshort,itwassimplynotpossible,underthe circumstances,topreventthefailureofAIGwithouthavingthegovernmentstepin. 2) Prepackagedbankruptcy Othershavesuggestedthatthegovernmentshouldhaveexploredtheoptionofaprepackaged bankruptcyforAIG.Aprepackagedbankruptcytypicallyrequiresmonthsofplanningandpreparation. Bycontrast,inSeptember2008,theFRBNY,havinghadnopreviousregulatoryorsupervisoryauthority overAIGorAIGFP,didnothavetimetoorganizeAIGsthousandsofcreditorsandhundredsof regulators(inover100countries)intoaneffectivenegotiatingcommittee,letalonestructureaplanof reorganizationwiththemandimplementit. TheimpracticalityofaprepackagedplanprocessforAIGwasnotmerelyabouttiming,however,as therewasamorefundamentalproblem.AIGsbusinessdependsonitscustomersandlenders perceptionofitslongtermviability.Unlikeamanufacturingorretailcompany,thestabilityofa
.. financialinstitutionlikeAIGdependsonitscustomersandcounterpartiesconfidencethatitwillbe goodforthemoney.Amanufactureroraretailercancontinuetosellitsproductsduringthe restructuringofitsbalancesheetsolongasithasphysicalgoodstosell.AfinancialinstitutionlikeAIG cannot.Abalancesheetrestructuringinvolvingthecompromiseofitsobligations,whetherinoroutof formalbankruptcyproceedings,isfundamentallyinconsistentwiththebasiccommitmentthatan insurancecompanygivestoitscustomers:thatitwillhonoritslongtermpaymentobligations. Similarly,evenwithanannouncedgovernmentfacilitytobridgeAIGtoandthroughbankruptcy,atthe firsthintthatAIGhadcommencednegotiationswithitscreditorsoverthepotentialrestructuringof theirdebt,AIGsabilitytosellnewinsurancepolicieswouldlikelyhaveevaporated.Equallydamaging, redemptionsofoldpolicieswouldhavefurtheraccelerated.Together,thelossofnewsalesandthe increaseinredemptionswouldhavecreatedahugedrainontheinsurancesubsidiariesliquidity. Similarly,shorttermcreditors,suchasAIGssecuritieslendingcounterparties,wouldhavelikelyrefused torollovertheirloans,demandingimmediatepaymentinstead.ThatrunonAIGanditssubsidiaries liquiditywouldhaveforcedregulatorstoprotectallpolicyholdersintheirjurisdictionsbyringfencing theinsurersassetsor,intheextremecase,forcingtheinsurerintowinddownproceedings.Inaddition, itisprobablethatinordertoeffectuateaprepackagedbankruptcy,thesizeofagovernmentbridge facilitywouldhaveneededtobemuchlargerthantheamountofassistancethegovernmentactually providedtostabilizethecompany. Moreover,atthetimethereexistednoresolutionauthoritytoresolveAIG,suchasthemannerin whichtheFDICresolvesbanks.AIGsliquiditypositionandthevalueofitsunderlyinginsurance subsidiarieswereinextricablylinkedtotheratingoftheparentcompany.Sowithnootherresolution alternative,theonlywaytoavoidthesystemicrisksassociatedwithachapter11filingofAIGwasto provideAIGwith(i)sufficientliquiditytomeetitsobligationstoitscreditorsandcounterpartiesinthe ordinarycourseofbusinessinfull(soastoavoidanydefaultsthatmighttriggerinsolvencyproceedings), and(ii)sufficientequitytomaintainAIGsinvestmentgraderating(soastopreservetheviabilityofits insurancesubsidiariesandtoavoidfurthercollateralcallsatAIGFP). Bycontrast,commencementofbankruptcyproceedingsforthosesubsidiariesofAIGthatwereeligible forchapter11reliefwouldhavetriggeredratingsdowngradesateachofAIGsmajorinsurance subsidiarygroupsandwouldalmostcertainlyhaveresultedinthecommencementofreceivership, rehabilitationorwinddownproceedingsbylocalinsuranceregulators,affectingtheredemptionand surrenderrightsofmorethan100millionlifeinsuranceandannuitypolicyholders,globally.Withits insurancesubsidiariesinseparateregulatoryproceedingsin130countries,anysaleofAIGsmajor insurancebusinessunitsasintegratedwholeswouldhavebeenextremelydifficult. Thesefurtherdowngradesbytheratingagencieswouldalsohavetriggeredadditionalcollateralcallsat AIGFP,puttingAIGsliquidityunderevengreaterstress.Inalllikelihood,thepolicyholderrunonAIGs insurancesubsidiariesandthecounterpartyrunonAIGFPwouldhavestartedinearnestbeforeanypre packagedplancouldhavebeenputtoavote. 3) Conditionallending SomehavesuggestedthatthegovernmentshouldhavemadeitsassistancetoAIGconditionalon certaincreditorstakingdiscountsontheirclaims.Thereareanumberofreasonswhythegovernment didnotdosowhicharediscussedinthetestimonyreferredtoearlier.Mostimportant,hadthe governmentconditioneditsassistanceonAIGscoercionofcertaincreditorstoreducetheiramounts dueandowedfromAIG,thegovernmentwouldhavecreatedtheveryconditionsofdefaultthatitwas
.. seekingtoavoid.ThecoercionwouldhaveundercutthegovernmentsprimarygoalinprovidingAIG withnecessaryliquidityenablingAIGtopayitscustomersandcreditors,maintainconfidence,and avoidfurtherratingdowngradesanddefault.Thetactichasbeenusedincertainsovereigndebt restructurings,butitcanbeusedthereonlybecausesovereignscannotgobankrupt,anditgenerally requiresmonthsofplanning. Inaddition,anyattempttoconditionthegovernmentslendingwouldhavecreatedfurtheruncertainty astowhichofAIGscounterpartieswouldhavebeenpaidandwhichwouldhavebeenforcedtotake losses.Moregenerally,conditionallendingwouldhaveunderminedthepublicstrustinthe governmentscommitmenttothebroaderrangeofextraordinaryfinancialstabilityinitiativesunderway duringthatveryfragileperiod.Oneoftheobjectivesatthetimewastocalmmarketparticipants.The marketuncertainty(andthepotentialallegationsoffavoritism)thatwouldhavefollowedfrom conditionallendingwouldhaveunderminedthataim.Suchanactionwouldhavecausedconfusionand doubtaboutwhatthegovernmentmightdo.Forinstance,wouldthegovernmentforcethecreditorsof otherinstitutionstotakehaircutsasaconditionofassistanceand,ifso,whichones? Finally,conditionallendingmightnotnecessarilyhaveevenworked:wouldacreditorwhowaspressed foradiscountsimplyrefuseanddeclareadefault?Insum,conditionallendingwouldhaveheightened theriskofanAIGdefault,whichiswhatthegovernmentwastryingtoanddidavoid. c. WasthetreatmentofAIGsderivativecounterpartiesappropriate? VariousquestionshavebeenraisedabouthowAIGscounterpartiesweretreatedwhenMaidenLaneIII wasestablished.Whilethefinancialcontractsinvolvedwerecomplex,basically,AIGhadagreedto insurethevalueofcertainriskysecuritiescalledmultisectorCDOs.Thevalueofthesesecuritieswas tiedtopoolsofotherassets,mostlysubprimemortgages.Asthefinancialcrisisintensified,thevalueof thesecuritiesfellsharply,andAIGhadtopostcollateralormakepaymentsontheinsurance. TheproblemwasthatAIGhadwrittenbillionsofdollarsofinsuranceontheseCDOswithoutsufficient capital.AIGwasfineaslongasthepricesoftheassetsitinsureddidntfall,anditsowncreditrating didntfall.Butifeitherhappened,itwouldbeintrouble.Inthefallof2008,botheventsoccurred.The valueoftheassetsandAIGscreditratingfell,bringingAIGtothebrinkofbankruptcy. ByAugustof2008,AIGhadalreadypaidoutover$16billiontocounterpartiesoncontractssimilarto theonesthatMaidenLaneIIIwasdesignedtoaddress.WhentheFederalReserveestablishedtheinitial creditfacilityonSeptember16,2008,itknewthattherecouldbefurtherdemandsofthissort.Inthe midstoftheongoingfinancialcrisis,theunderlyingmortgagesecuritieswerelikelytocontinueto declineinvalue. Thegovernmentfacedthefollowingoptions:letAIGdefaultonthesecontracts;continuetolendAIG moneysoitcouldmeetitsshorttermobligations;orrestructurethecontractstostopthe hemorrhaging,andpotentiallyrecovervalueontheminthefuture.IfthegovernmenthadletAIG default,itwouldhavegoneintobankruptcy,triggeringallthedisastrouseconomicconsequences describedearlier.IfthegovernmenthadsimplycontinuedtolendAIGmoney,itwouldhavefeda viciouscycle.AIGcouldhavemadeitscurrentpayments,butthiswouldhaveincreasedAIGsdebtata timewhentheratingagenciesfeltAIGalreadyhadtoomuch.Anyresultingdowngradebytherating agencieswouldhavefurtherthreatenedAIGsviability,drivingmoreuncertaintyandpanicthroughthe entirefinancialsystem,andrequiringevenmorefinancialsupport.
.. Instead,thegovernmentsoughttorestructurethecontracts.Thecounterpartiesheldinsurance contractsentitlingthemtofullorparvalueofthecontract.SomehavesuggestedthattheFRBNY shouldhaveuseditsregulatoryauthority,orsomeothermeans,tocoerceAIGscounterpartiesto acceptdiscounts.Thiswasnotaviableoptioneither.IftheFRBNYhadsoughttoforcecounterparties toacceptlessthantheywerelegallyentitledto,marketparticipantswouldhavelostconfidenceinAIG, customerswouldhavesoughtotherplacestodobusiness,andtheratingsagencieswouldhave downgradedAIGagain.ThiswouldlikelyhaveledtoAIGscollapseandthreatenedthegovernments effortstorebuildconfidenceinthefinancialsystem.Thiswouldhavelikelymeantadeeperrecession, morefinancialturmoil,andamuchhigherlongtermcostforAmericantaxpayers. Operatingwiththeseconstraints,theFRBNYandAIGinitiateddiscussionswiththemajorcounterparties aboutwhethertheywouldbepreparedtoacceptconcessionsonthepricesofthesecurities.The governmentknewthatthelikelihoodofsuccesswasmodest.Relativelyquickly,mostfirmsdeclared thattheywouldnot,onanycondition,providesuchaconcession.Onesaidthatitwaswillingtoaccept asmalldiscount,butonlyifeverybodyelsewouldagreetoequalconcessionsontheirprices. Inordertocanceltheinsurance,theCDOswerepurchasedforfairmarketvalue,whichatthetimewas about48centsonthedollar.16 Thecounterpartiesalsokeptthecashthattheyhadalreadyreceived fromAIG.Takentogether,thesetwoamountsapproximatelyequaledtheoriginalparvaluethatthe bankshadinsured.IndesigningandimplementingthistransactiontheFederalReservesobjectivewas, asitalwaysis,togetthebestdealforthetaxpayer.TheFederalReservemadejudgmentsaboutthese transactionscarefullywiththeadviceofoutsidecounselandfinancialexperts.BecauseMaidenLaneIII canholdtheunderlyingCDOstomaturity,itislargelyimmunefromshorttermvolatilityandliquidity needs,andisthereforeinabetterpositiontomaximizethevalueoftheCDOportfolio. Infact,sinceMaidenLaneIIIpurchasedthesecurities,theyhavegeneratedsignificantcashflows.These havebeenusedtopaydowntheFRBNYsloanbyover$9billion.ItislikelythatMaidenLaneIII(aswell asMaidenLaneII)willpaytheFRBNYbackinfullandgenerateaprofitforU.S.taxpayers.Whilethe immediateobjectivewastopreventAIGscollapse,thegovernmentbelievesthatstrategythatthe FederalReserveandtheTreasurypursuedinestablishingMaidenLaneIIIwillgenerateabetterlong termoutcomefortaxpayersthanwouldhaveanyalternativeavailableatthattime.
16
Atthetime,theCDOshadafairmarketvalueofabout$29.6billionandaparvalueofapproximately$62billion.
6.RetrospectiveontheTARPHousingInitiatives
.. Thissectionexaminesthedevelopment,accomplishments,challengesandevolutionofTreasurys housinginitiativesunderTARP.Thebasictermsoftheseprogramsaresummarizedinthesubsection titledSummaryDescriptionofHousingProgramsonpage77. A. TheCrisis Inthebeginningof2009,theU.S.economywasfacingthefalloutfromahousingbubblethatbysome measureshaddoubledhomepricesinaperiodofsixyears.Duringtheheadydaysofthebubble, lendershadmigratedtoriskiermortgageproductsandborrowershadextractedequityfromtheir homes.From2003through2006,theshareofmortgagesthatmettherelativelyconservative underwritingguidelinesofFannieMae,FreddieMac,andthegovernmentfellroughlyinhalf,fromtwo thirdstoonethird,whileriskierproductssuchassubprimeandAlternativeA(AltA)loansgained marketshare. Delinquencyratesonmortgageshadrisensignificantly,particularlyonriskierproducts;loanswere defaultingatoverthreetimestheirearly2004rate.AltAandsubprimeloans,whichcompriseda combined19percentofOCCregulatedbanksportfoliosinearly2009,accountedfornearlyhalfofthe seriouslydelinquentloans. Abacklogofseriouslydelinquentloanshaddeveloped,throughacombinationofstateforeclosure moratoriaandtheinabilityofservicerstomanagetheunprecedentedvolumeofdefaults. Stressesinthefinancialsystemhadreducedthesupplyofmortgagecredit,limitingtheabilityof Americanstobuyhomes.FannieMaeandFreddieMachadbeeninconservatorshipforoverfour months.AndmillionsofresponsibleAmericanfamilieswhoweremakingtheirmonthlypayments despitehavinglostjobsorincomehadseentheirpropertyvaluesfall,andwereunabletosellor refinanceatlowermortgagerates.Thecombinationoffallinghomepricesandeconomiccontraction hadsharplyincreasedthefinancialstrainsonmanyresponsiblehomeowners.Atthebeginningof2009, nearlyonequarterofhomeownersowedmoreontheirmortgagesthantheirhomeswereworth.
.. Figure6A:
Figure6B:
ShareofLoans90+ DaysDelinquent orInForeclosure

Percent ofLoans
8 7 6 5 4 3 2 1 0 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1
Source:MBA DelinquencyStatistics
.. Figure6C:
ProductMix
Billions ofDollars $4,500 $4,000 AltA $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: InsideMortgageFinance. Conventio nal/Confor ming FHA/VA Jumbo HELOC
Subprime
B. PolicyResponses
Duringitsfirstmonthinoffice,theObamaAdministrationtookaggressiveactiontoaddressthehousing crisis.InFebruary2009,PresidentObamaannouncedtheHomeownerAffordabilityandStabilityPlan. Aspartofthisplanandthroughotherhousinginitiatives,theAdministrationtookthefollowingactions tostrengthenthehousingmarket: LaunchedtheHomeAffordableModificationProgram(HAMP),whichwouldpermanently reducemortgagepaymentstoaffordablelevelsforqualifyingborrowers; ProvidedstrongsupporttoFannieMaeandFreddieMactoensurecontinuedaccessto affordablemortgagecreditacrossthemarket; Purchased,throughTreasuryandwiththeFederalReserve,morethan$1.4trillioninagency mortgagebackedsecurities,whichhelpedkeepmortgageratesathistoriclows,allowing homeownerstoaccesscredittopurchasenewhomesandrefinanceintomoreaffordable monthlypayments; ThroughtheFederalHousingAdministration(FHA),providedliquidityforhousingpurchasesata timewhenprivatelendinghaddeclined,playinganimportantcountercyclicalrole; SupportedexpandingthelimitsforloansguaranteedbyFannieMae,FreddieMac,andFHAfrom previouslimitsupto$625,500perloanto$729,750; ExpandedrefinancingoptionsforFannieMaeandFreddieMacloans,particularlyforborrowers withnegativeequity,toallowmoreAmericanstorefinance;
.. ThroughARRA,providedmorethan$5billioninsupportforaffordablerentalhousingthrough lowincomehousingtaxcreditprogramsand$6.92billioninsupportforaneighborhood stabilizationprogramtorestoreneighborhoodssufferingconcentratedforeclosures. Supportedataxcreditforfirsttimehomebuyers,whichhelped2.5millionAmericanfamilies purchasehomes;and
AsMarkZandi(aformereconomicadviserforSenatorJohnMcCains2008presidentialcampaign)and AlanS.Blinder(aformereconomicadviserforPresidentClinton)notedinapaperreleasedinJuly2010, thegovernmentsfinancialandfiscalpoliciestendtoreinforceeachother,suchthatthecombined effectexceedsthesumoftheparts.Forexample,providinghousingtaxcreditsaspartofthestimulus boostshousingdemandandthereforehouseprices.Foreclosuresdecrease,andthefinancialsystem sufferssmallerlosses,which,inturn,enhancestheeffectivenessofthegovernmentseffortstostabilize thefinancialsystem. C. DesignofHAMP AspartofthatHomeownerAffordabilityandStabilityPlan,pursuanttotheauthoritygrantedinEESA, theObamaTreasuryDepartmentbeganworkonaprogramthatwouldimprovetheaffordabilityof mortgagesforresponsiblehomeowners,consistentwiththemandateofEESAtopromotefinancial stabilitywhileprotectingtaxpayers.Developingtheprogramposedverydifficultandchallengingpolicy tradeoffshowtomakemeaningfulinterventionsthatyieldahighprobabilityofparticipationand broadlysupportborrowersuccesswhileminimizingthecosttothegovernment,moralhazard,adverse selection,andoperationalandfinancialrisksandcomplexity. Inaddition,legalandotherconstraintsrequiredTreasurytodevelopavoluntaryprogramthatwould supportservicerseffortstomodifymortgages.TARPhadoriginallybeenconceivedasaprogramto purchasetroubledassetsdirectlyfromthebalancesheetsofbanks,andtotheextentTreasuryacquired mortgages,ithadauthoritytomodifythemdirectly.TARPwasnotprimarilyusedforthispurpose. EESAauthorizedcertaintypesofprogramstoassisthomeownersbutconstrainedTreasurysabilityto setupamandatorymodificationprogram.Directassistancetoborrowerswouldnotbeconsistentwith thelaw,andvalidmortgagecontractswouldhavetoberespectedbyanyprogramTreasuryestablished. Consequently,theselegalconstraintsforcedTreasurytoseekthevoluntarycooperationofmortgage servicersandinvestors. Whiledesigningaprogramtoimprovetheaffordabilityofmortgagesforresponsiblehomeownerswas difficult,theproblemfacingthemortgageindustrywasclear:loanservicersweresimplyunequippedto managethemagnitudeofthecrisisbeforethem.Theservicerswerestructuredandstaffedtoperform alimitedrole:collectingpaymentsandforeclosingondelinquentmortgages.Theydidnothavethe systems,staffing,operationalcapacityorincentivestoengagewithhomeownersonalargescaleand offermeaningfulrelieffromunaffordablemortgages.Moreover,theexpansionofprivate securitizationsduringthehousingboomleftservicersinacomplicatedlegalsituation;contractual languagedesignedduringtheheadydaysofthebubblevaguelyboundthemtomaximizeinvestor returns,butlittlespecificguidanceexistedonhowthatmightbeaccomplishediftheenvironment turnedsour.Atthetime,therewasnoconsensusamongloanservicersabouthowtorespondto responsibleborrowerswhowerewillingtocontinuemakingpaymentsbutwereinneedofsome mortgageassistance.
.. InAugust2008,SheilaC.Bair,ChairmanoftheFDIC,announcedaplanfortheFDICtosystematically modifytroubledmortgagesownedorservicedbyIndyMacFederalBank.Theprogramwouldusea standardizedmodificationprocess,includinginterestratereduction,termextension,andprincipal forbearance,toachieveamortgageaffordabilitytarget,definedasamonthlymortgagepaymentofno morethan38percentofgrossmonthlyincome,whichwaslaterloweredto31.TheFDICprogramalso proposedadecisionmakingframeworkthatexplicitlycomparedthedifferenceincashflowsa mortgageholderwouldreceivewithandwithoutanFDICmodification,andtheprobabilitythe borrowerwouldultimatelysufferforeclosureineithercase. ThoughthescaleoftheFDIC/IndyMacprogramwassmallrelativetothenationalcrisis,theintroduction ofastandardizedmodificationobjective,amethodforachievingit,andadecisionmakingframework markedabreakthroughinthemortgageinvestingandservicingindustries'approachtoforeclosure avoidance.Towardtheendof2008,agroupofcounselors,mortgagecompanies,investors,andother mortgagemarketparticipantscalledtheHopeNowAllianceproposedastreamlinedloanmodification approach,whichrepresenteditsbestplantoofferrelieftoborrowersandtopreserveitsmembers investmentsinmortgages.Shortlythereafter,FannieMaeandFreddieMacadoptedthestreamlined loanmodificationaspolicy.Thisstandardizedmodificationwouldreducetheborrowersobligationto nomorethan38percentoftheborrowersincomethroughanycombinationofinterestratereduction, termextension,andprincipalforbearance. TheHopeNowAllianceframeworkdemonstratedtheprivatesectorswillingnesstoworktowardfinding solutionstoimproveborrowerandinvestoroutcomes.Buttheprogramhadseriousdrawbacks.The proposedmodificationframeworklackedamechanismfordecidingwhentoapplythemortgage modification.Servicerslegalobligationstowardmodifyingsecuritizedloansremaineduncertain,and servicerscontinuedtobeparalyzedbytheneedtoseekapprovalfrominvestorsonamortgageby mortgagebasis.Therewerenoacceptedtimeframesforservicerdecisions.Asaresult,thestreamlined loanmodificationwasappliedirregularly,andrepaymentplansratherthanmorepermanent modificationsolutionsremainedafavoredtoolforservicers.Inthefirstquarterof2009,onlyhalfof modificationsloweredborrowerspayments,andnearly40percentofservicershomeretentionefforts tooktheformofrepaymentplansratherthanmodificationsormodificationtrials.Asaresult,hundreds ofthousandsofresponsibleAmericanfamiliessimplylosttheirhomes. TheObamaAdministrationrecognizedthemomentumintheprivatesectorreflectedinHopeNows effortsandsoughttobuilduponit.Understandingthatthesolutionwasincomplete,theAdministration concludedthatgovernmenthadacrucialroletoplayinclarifyinglegalarrangementsbetweenservicers andsecuritizedtrusts,creatinguniformityinthedecisionmakingprocess,andsubsidizingmore generousmodificationsthatwouldbetterstabilizeborrowers. TheAdministrationchallengeditselftodevelopaprogramthatwouldprotecttaxpayersatthesame timethatitbroadlyofferedresponsible,butstruggling,homeownerstheopportunitytoremainintheir homesatmoreaffordablepaymentlevels.TheAdministrationdeterminedthatinordertoachieve theseobjectivessimultaneously,itwascriticaltoleavethefinancialriskofmodificationredefaultwith theinvestors.Ultimately,theprogramshouldoffertheopportunitytomany,butthetaxpayershould payonlytotheextentthedistressedborrowerisassistedbyapermanentmodificationthatremainsin effect.
.. HAMPwasbuiltaroundfourcoreprinciples,designedtohelpthelargesegmentofatriskhomeowners forwhomforeclosureisavoidableandwhowanttostayintheirhomes. First,theprogramfocusedonaffordability,inanefforttoensurethatborrowerswhohopetoremainin theirhomeswouldbeabletoaffordthemodifiedmortgagepayment.Everymodificationunderthe programwouldberequiredtolowertheborrower'smonthlymortgagepaymentto31percentofthe borrower'smonthlygrossincome,alevelestimatedtoprovidereasonableassurancethatthe modificationwouldbesustainable.Theborrowersmodifiedmonthlypaymentwouldremaininplace forfiveyears,whichTreasuryexpectedwouldprovidesufficienttimeforthehousingmarketandthe financialsystemtorecover. Second,HAMPwouldprotectthetaxpayerbyemployinganinnovativepayforsuccessstructureand requiringtheinvestorinthemortgagetoretaintheriskoffutureredefault.Thisstructurealignedthe interestsofservicers,investors,borrowersandtaxpayersandencouragedloanmodificationsthatwould bebothaffordableforborrowersoverthelongtermandcosteffectivefortaxpayers.Servicerswould receiveanupfrontpaymentof$1,000foreachsuccessfulmodificationaftercompletionofthetrial period,andpayforsuccessfeesofupto$1,000peryearforthreeyears,iftheborrowercontinuedto makepaymentsontimeandinfull.Homeownerswouldearnupto$1,000inprincipalreductioneach yearforfiveyearsiftheyremainedcurrent.HAMPalsomatchesreductionsinmonthlypaymentsdollar fordollarwiththelender/investorastheyarereducedfrom38percentoftheborrowersincome(a38 percentdebttoincomeratio,orDTI)to31percentDTI.Thisrequiresthelender/investortoshare withtheTreasurythefirstlossinreducingtheborrowerspaymentdowntoa38percentDTI,requiring lenders/investorstoshareintheburdenofachievingaffordability.Toencouragethemodificationof currentloansexpectedtodefault,HAMPprovidesadditionalincentivestoservicersand lenders/investorsaftercurrentloansaremodified.Theseincentivesweredeemedcrucialtothesuccess ofaprogramthat,underEESA,wouldhavetoelicitthevoluntaryparticipationofservicers,investors andhomeowners. Third,whileparticipationinHAMPwouldbevoluntaryformortgageservicers,servicerswhochoseto participatewouldbepreventedfromcherrypickingloanstomodifyinamannerthatmightdeny assistancetoqualifiedborrowersatgreatestriskofforeclosure.Anyservicerthatsignedupforthe programwouldberequiredtoevaluateeveryeligibleloanusingastandardnetpresentvalue(NPV)test. Ifthetestwaspositive,theservicerwouldberequiredtomodifytheloan. Fourth,unemployedborrowerswouldbeallowedtoparticipateintheprogram.Unemployedborrowers whohadninemonthsormoreofunemploymentinsuranceremainingwouldbeeligibletoincludeitin theirincomeforconsiderationintheNPVcalculation.Unemployedborrowersarealsoallowedto includeothersourcesofpassiveincomelikerentalincomeandincomefromanemployedspouse. ThebasicHAMPtermswereasfollows:aparticipatingHAMPservicerappliesaseriesofmodification stepstoreducethehomeownersmonthlymortgagepaymentto31percentofthehomeownersgross (pretax)income,inthefollowingorder:ratereductiontoaslowastwopercent;termextensionupto 40years;andprincipaldeferral(orforbearance,attheservicersoption).Themodifiedinterestrateis fixedforaminimumoffiveyears.Beginninginyearsix,theratemayincreasenomorethanone percentagepointperyearuntilitreachestheFreddieMacPrimaryMortgageMarketSurveyrate (essentiallythemarketinterestrate)atthetimethepermanentmodificationagreementwasprepared.
.. Beforeamortgageispermanentlymodified,thehomeownermustmakethenew,reducedmonthly mortgagepaymentontimeandinfull,andsubmitthenecessarydocumentation,duringatrialperiodof threemonthstodemonstratethatthemodifiedmonthlypaymentissustainable.Homeownerswho makepaymentsonpermanentlymodifiedloansontimeaccrueanincentiveof$1,000peryearto reducetheamountofprincipaltheyoweuptoamaximumof$5,000. Anymodificationofferwillprovideabindingreductioninpaymentsforborrowerswhocontinuetomeet thefulltermsofthemodification,whetherinthetrialphaseorafterhavingconvertedtoapermanent modification. D. HAMPTargeting Protectingtaxpayersrequiredthatthenewprogramnotaimtopreventallforeclosures.Itwouldbe unfairtoasktaxpayerstosubsidizemortgagesforspeculatorsandownersofmilliondollarhomesor vacationhomes.Homeownerswerefacingforeclosureforanumberofreasons,manyofthemoutside thecontroloftheborrowers:somewereputinunsustainableloans;manysawtheirincomesdecline.In addition,Treasuryrecognizedthathomeownerswhocouldnotaffordtoremainintheirhomeseven afterreceivingasubstantialreductioninpaymentscouldbeservedbetterbyassistanceinrelocatingto moreaffordablehousing.Furthermore,Treasuryrecognizedthatpreventingallforeclosureswouldbe extremelyexpensive,wouldfurtherincreasetheshadowinventoryofhousingstock,andwoulddelay thestabilizationofhousingpricesatrealisticlevelsreflectingarebalancingofsupplyanddemand. TheAdministrationthereforeidentifiedfourseparategroups,andtookadifferentapproachtoward each: 1. Homeownerswhoeitherarelikelytofindwaystoremainintheirhomeswithoutgovernment assistanceor,forpolicyreasons,thegovernmentshouldnotassist.Thisgroupincludes homeownerswithjumbomortgages,nonowneroccupiedhomesandspeculativeproperties. Theprogramwouldnotassistthesehomeowners. 2. Homeownerswhoareverylikelytolosetheirhomes,evenwithgovernmentassistance.This groupincludeshomeownerswhopurchasedhomesthattheysimplycouldnotafford,eitherasa resultofpoorunderwritingorbecausetheyprovidedincompleteormisleadinginformation (oftenattheurgingoforiginators).Italsoincludeshomeownerswholosttheirjobs,areunlikely toregainemploymentwithcompensationcomparabletotheirpriorincomesand,duetohigh debttoincomeratios,wouldlikelydefaultevenwithalowermonthlypayment.Theprogram wouldassistthesehomeownersinrelocating,buttryingtopreventforeclosurewouldnotbea justifiedorconstructiveintervention. 3. Homeownerswhohavemadethedecisionthattheynolongerwanttoremainintheirhomes, regardlessofaffordability,didnotrespondtorepeatedeffortstocontactthemandwerewilling towalkawayfromtheirmortgages.Theprogramwouldnotassistthesehomeowners. 4. Middleclassworkinghomeownersinowneroccupiedhomeswhoareatriskoflosingtheir homesbutforwhomgovernmentassistancewouldsignificantlyimprovetheoddstheywould avoidforeclosures.Helpingthesehomeownerswouldpreventunnecessarypainandsuffering andwouldhelptostabilizehousingmarkets.Thiswasthetargetgroupforloanmodifications throughHAMP.
.. TheprogramthatTreasurydeveloped,HAMP,wasthereforeanimportantpartbutonlyonepartof theObamaAdministrationscomprehensiveresponsetothefinancialandhousingcrisis.Basedon economicconditionsatthetime,HAMPwasexpectedtoofferuptothreetofourmillionresponsible Americanhomeownersatriskofforeclosurereducedmonthlymortgagepaymentsthatwere sustainableoverthelongterm,providingthesehomeownerswithachancetomodifytheirmortgages andavoidforeclosure. ItisimportanttoemphasizethatHAMPwasnotintendedtohelpallborrowers.Asnotedabove,itwas intendedtohelpanimportantsegmentofborrowerswhowerecurrentlyatriskofforeclosureorwho wouldbeatriskpriortotheendof2012,includingonlythosehomeownerswho: ownedandoccupiedtheirhomesasaprimaryresidence; hadloanbalanceslessthan$729,750; tookouttheirmortgagespriortoJan.1,2009; hadcontractualmortgagepaymentsthatweregreaterthan31percentoftheirgrossmonthly income; couldaffordtomakereasonablepaymentsonmodifiedmortgages; couldprovidedocumentationofincomeandhardship;and wantedtoremainintheirhomesandwerewillingtoremaincurrentontheirpaymentsand complywithprogramterms. TheAdministrationoriginallyprojectedthatthenewprogramwouldofferhelptothreetofourmillion familiesthroughtheendof2012,expectingmostofthesetofamiliestoactontheofferofhelpandto receiveapermanentmodification.Treasurydevelopedotherstrategiestotransitionborrowersoutof homeownershipinthemannerleastdisruptivetothemortheircommunities,whenatrialmodification didnotconverttoapermanentsolution.Amongthistargetpopulation,Treasuryalsoexpectedthat therewouldunfortunatelystillbesomeborrowerswhowouldnotrespondtooutreacheffortsorwho wouldnotactontrialmodificationofferswhenextended,thougheveryeffortwasplannedtoreachout tothispopulation.Despiterecognizingthatnoteverytrialmodificationwouldbesuccessful,working withservicers,housingcounselorsandothers,Treasurywouldstrivetoreachasmanyeligibleborrowers aspossible. E. EarlySuccessesandChallenges InthefirstyearoftheHAMPprogram,Treasurymadesubstantialprogressinmanykeyareas.Treasury broughtallstakeholderstothetableservicers,investors,lenders,homeownerstoassistasfastas possible.Treasurysetagoalof500,000trialmodificationsbyNovember1,2009.Eventhough participationwasvoluntaryinaccordancewithEESA,Treasuryquicklyrecruitedservicerstothe program.OveronehundrednonagencyservicerssignedupforHAMP,inadditiontothemany hundredsservicingloansonbehalfofFannieMaeandFreddieMac.Closetoninetypercentof mortgageloansnationwidewerequicklycoveredbyparticipatingservicers.
.. Figure6D: Number ofHAMPServicers (nonagency) 120 100 80 60 40 20 0
Source:U.S.DepartmentoftheTreasury:HomeownershipPreservationOffice
AlmostonemonthaheadoftheNovember1,2009benchmark,HAMPreachedthe500,000trialloan modificationsmilestone.Thisgoalhadpushedservicerstorampupprogramimplementationand sustainafasterpaceofmodifications;trialmodificationswerebeingissuedatafasterratethannew homeownerswerebecomingeligible,helpingtoaddressthebacklogofdistressedhomeownerswho hadreceivedlittleassistancesincethehousingcrisisbecameapparentinmid2007.Asoftheendof February2010,822,000borrowershadbeeninthetrialphaseofthemodificationprocessformorethan threemonthsandcouldbeotherwiseeligibleforconversionsubjecttodocumentsubmissionand remainingcurrentonpayments.Ofthese,32percenthadreceivedpermanentmodificationsorhad beenapprovedforpermanentmodification(170,000permanentandanother92,000approvedfor permanent). Nearly1.4millionborrowerswereincontactwiththeirservicersandwereapprovedforandextendeda modificationoffer,with1.1millionoftheseapprovedoffersresultinginmodificationtrials.Therunrate ofeligibleborrowersapprovedforandstartingmodificationswasatorabovethetargetrateset internallybyTreasuryof20,00025,000perweek.The1.1millionborrowerswhostarted modificationshadtheirpaymentsreducedbyamedianamountofmorethan$500.Andeventhose borrowerswhodidnotultimatelyobtainapermanentmodificationreceivedrealreliefasaresultof reducedpaymentsduringthetrialperiod,alongwiththeopportunitytobecomecurrentorpursuea foreclosurealternativelikeashortsale. Whiletheoverallnumberofborrowersinpermanentmodificationsrosesubstantially,theconversion ratetopermanentmodificationswasbelowanticipatedlevels.WhentheprogramlaunchedinMay 2009,servicerswereexplicitlyprovidedflexibilitytoapproveborrowersfortrialmodificationswithout documentationofincomeinordertoreachmoreborrowersmorequickly.Thisapproachwasintended toprovidemoreimmediatereliefandallowtheprogrammeetpentupdemandformodificationsafter twoyearsofcrisisconditions,buytimeformanyhomeownerstofindpermanentsolutionsoutsideof theforeclosureprocessandfacilitatehousingmarketstabilization.Thoughsomeservicersrequired
.. somedocumentsupfront,inpracticemostservicersstartedtrialsonthebasisofaverbalincome statementfromtheborrower.Intheearlyfallandoverthecomingmonths,asthefirstlargenumbersof borrowersreachedatriallengththatwouldallowthemtobecomeeligibleforconversiontoa permanentmodification,servicersexperiencedsubstantialdifficultyincollectingandprocessing applicationsandmakingdecisionsbasedonthedocumentationprovided.Themodificationconversion processwasmuchmorechallengingthanTreasuryoriginallyanticipatedasaresultofseveralfactors, includinginsufficientcapacityandexecutionatmostservicers,alackofborrowerwillingnessorability toprovidenecessarydocumentation,frequentinconsistenciesbetweenverbalandverifiedincomethat resultedinborrowersbeingdeemedineligiblefortheprogram(e.g.,aborrowersverifiedincome demonstratedthataborroweralreadyhadacontractpaymentbelow31percentoftheborrowers monthlyincome),andaprocessthatprovedmorecomplexadministrativelythanoriginallyconceived. Therefore,Treasurysmostimmediateandcriticalchallengebecameworkingwithservicerstoincrease therateatwhichtrialmodificationswereconvertedtopermanentmodificationsasquicklyaspossible. Asthefirstroundofmodificationsreachedthedeadlinetoconvert,Treasurycausedservicersto implementanaggressiveconversioncampaigntoaddressthechallengesthatborrowerswere confrontinginreceivingpermanentmodifications.Topreventhomeownersfromlosingtheirresidences duringtheextendedtrialperiod,Treasuryissuedguidanceprohibitingservicersfromforeclosingon homeownersbeforetheireligibilityforamodificationhadbeendetermined. OnJanuary28,2010,Treasuryissuednewguidancerequiringservicerstobegincollectingdocuments upfrontnolaterthanJune1,2010.Thiswasdoneindirectresponsetothechallengesofcollecting documentsduringthetrialperiod,andtohelpbetterensurethatmoreborrowerswhostart modificationsareabletoconverttopermanentstatus. Asnoted,theprogrammadesubstantialprogressinmanykeyareasthroughearly2010.The1.4million offersand1.1milliontrialmodificationsputTreasuryontracktomeettheinitialgoalofofferinghelpto uptothreetofourmillionborrowersviaamodification.Thepaceovermostofthefirstyearofroughly 100,000modificationstartspermonthsuggestedafinaltotalofoverfourmilliontrialmodifications. Inthespringof2010,themovetocollectdocumentsupfronttoachievebetteroverallconversions reducedthepaceofmodificationoffersmaterially;however,Treasuryexpectsthatrequiring documentationupfrontwillsubstantiallyimprovethesuccessrateoftrialmodificationsandspeed determinations. Treasuryalsoexpectsthatthenumberofborrowerswhodonotcompletetrialmodificationsbut ultimatelytransitiontootherformsofassistancewillgrowsubstantiallyandwillultimatelynumberin themanyhundredsofthousands.Acancelledtrialmodificationdoesnotmeanthattheprogramhas completelyfailedahomeownerorthattheborrowerwillinevitablyfaceforeclosure:HAMPexplicitly requiresservicerstoconsidertheseborrowersforotherforeclosurepreventionoptionsincluding proprietarymodificationsorotheroptionslikeashortsaleordeedinlieuofforeclosurethatalso preventaforeclosuresale.ThebroaderHAMPprogramprovidesborrowerswitharangeofassistance; successcanonlybemeasuredonanaggregatebasis,takingaccountofhomeownersindividual situationsandoutcomes.Basedonsurveydatafromtheeightlargestservicers,itisestimatedthata majorityofborrowerswhoareturneddownforatrialmodificationareofferedsomesortofforeclosure alternativeusuallyamodificationproprietarytotheservicer,orashortsaleratherthanproceeding directlytoforeclosure.
.. Therearearangeofimportantmeasuresofsuccess;keepinginmindthemeasuresmentionedabove,as wellasothersliketheeffectofHAMPonneighborhoodandhousingmarketstabilization,Treasury continuestomonitorprogressandpushforimprovedresults.HAMPhashadasubstantialimpacton avoidingforeclosuressofar(foreclosuresaleisprohibitedforthe200,000borrowersstillactiveinHAMP trialmodifications),andveryfewborrowersthathavequalifiedforHAMP(includingtheabilitytomake areasonablepaymentonamodifiedloanasmeasuredbyincomesufficienttopassanNPVmodel)have gonethroughforeclosuresaletodate.Inaddition,HAMPhastransformedthewaythemortgage servicingindustrytreatsborrowersindistress.BecauseofHAMP,servicershavedevelopedconstructive privatesectoroptions.Wheretherewasoncenoconsensusplanamongloanservicersabouthowto respondtoborrowersinneedofmortgageassistance,HAMPhasestablishedauniversalaffordability standard,a31percentdebttoincomeratio.Thishasenhancedservicersabilitytoreducemortgage paymentstosustainablelevelswhilesimultaneouslyprovidinginvestorswithajustificationfor modifications. TakingintoaccountHAMPseffectonstandardizingandexpandingproprietarymodificationsinthe mortgageindustry,thenumberofmortgagemodificationshasbeendoublethenumberofforeclosure completions:Morethan3.35millionmodificationswerearrangedfromApril2009throughtheendof July2010.Thisincludesmorethan1.3millionHAMPtrialmodificationsstarted,morethan510,000 FederalHousingAdministration(FHA)lossmitigationandearlydelinquencyinterventions,andnearly 1.6millionprivatesectormodificationsperformedbymembersoftheHOPENowalliance.Giventhe complexityofthemortgagemodificationprocessandthenumberofgovernmentandnongovernment modificationprogramsavailable,homeownersoftenreceivemorethanonemodificationarrangement. Thereforeitisdifficulttodeterminetheexactnumberofhomeownersassistedbymultipleprograms. Figure6E:
Onthemeasureofneighborhoodandhousingmarketstabilization,thesubstantialnumberof foreclosuresalesavoidedhascontributedtoamaterialimprovementinmarketexpectationsforhouse pricesandtomanysuccessivemonthsofstabilityinhomepricesinmuchofthecountry.But,as
.. discussed,effortsmustcontinuetocapitalizeonearlyencouragingsignsandovercomeremaining challenges.Therearestillanumberofriskfactorsthatwillchallengethestabilityofthehousing markets,includingthepotentialformortgageratestorise,continuingelevatedlevelsofdelinquencies exacerbatedbyunemploymentandthelargenumberofunderwaterborrowers,andtheassociated potentialforasubstantialincreaseinthenumberofforeclosuresales. Further,itisimportanttokeepinmindthatHAMPisonlyoneofmanyAdministrationhousingefforts thattargetthesechallenges:theAdministrationhasalsoprovidedsubstantialsupportforthehousing marketsthroughinvestmentinFannieMaeandFreddieMactohelpkeepmortgageratesaffordable; purchaseofagencymortgagebackedsecurities;refinancingopportunitiesthathaveallowedmorethan fourmillionborrowerstorefinancesincethelaunchoftheMakingHomeAffordableProgram(MHA); andaninitiativetoprovidesupportandfinancingtostateandlocalHousingFinanceAgencies(HFAs). TheseHFAsprovide,inturn,tensofthousandsofaffordablemortgagestofirsttimehomebuyersand helpdeveloptensofthousandsofaffordablerentalunitsforworkingfamilies,includingthosedisplaced bythehousingcrisisandforeclosures. SecondLienModificationProgram AfewmonthsafterlaunchingHAMP,Treasuryrolledoutitsfirstmajorexpansionoftheprogram:on August13,2009,TreasurypublishedguidanceintroducingtheSecondLienModificationProgram (referredtoas2MP).Under2MP,whenaborrowersfirstlienismodifiedunderHAMPandtheservicer ofthesecondlienisa2MPparticipant,thatservicermustoffertomodifytheborrowerssecondlien accordingtoadefinedprotocol,whichprovidesforalumpsumpaymentfromTreasuryinexchangefor fullextinguishmentofthesecondlien,orareducedlumpsumpaymentfromTreasuryinexchangefora partialextinguishmentandmodificationoftheborrowersremainingsecondlien.Although2MPwas initiallymetwithreluctancefromservicersandinvestorswhodidnotwanttorecognizelossesontheir secondlienportfolios,Treasuryhassignedupseveralofthelargestsecondlienservicersfor2MPthis year.Servicersparticipatinginthe2MPprogramserviceamajorityofoutstandingsecondliens. HomeAffordableForeclosureAlternativesProgram Anymodificationprogramseekingtoavoidpreventableforeclosureshaslimits,HAMPincluded.HAMP doesnot,norwasiteverintendedto,addresseverydelinquentloan.BorrowersnotqualifyingforHAMP maybenefitfromanalternativethathelpstheborrowertransitiontomoreaffordablehousingand avoidthesubstantialcostsofaforeclosure.OnNovember30,2009,theAdministrationannouncedthe HomeAffordableForeclosureAlternatives(HAFA)Program,pursuanttowhichTreasuryprovides incentivesforshortsalesanddeedsinlieuofforeclosureforcircumstancesinwhichborrowersare unableorunwillingtocompletetheHAMPmodificationprocess.Borrowersareeligibleforrelocation assistanceof$1,500andservicersreceivea$1,000incentiveforcompletingashortsaleordeedinlieu offoreclosure.Inaddition,investorsarepaidupto$1,000forallowingshortsaleproceedstobe distributedtosubordinatelienholders. F. TheSecondPhaseofHAMP Duringthefallof2009,inadditiontothechallengesarticulatedabove,HAMPfacedotherchallenges. SomeservicersfellshortofcommitmentstheyhadmadetoTreasurytoclearouttheirbacklogsofloans inagedtrialmodifications.Participationin2MPwaslowerthanTreasuryhadhoped.Theevolutionof
.. theeconomiclandscapesinceearly2009haddirectedattentiontowardtwoproblemstheprograms broadframeworkhadnotspecificallytargeted:unemploymentandnegativeequity. During2009, employmenthaddeterioratedseverely,andwhilehomepriceshadbeguntoshowsignsofstabilizingby late2009,analystsprojectedaprotractedperiodofrecoverybeforepricesreturnedtotheirprecrisis levels.Unemploymentandnegativeequityappearedtobethemainpotentialcausesofdefaultsgoing forward.Inresponse,TreasurybegandesigninganewphaseofHAMP,withinputfromvarious constituencies. InMarch2010,theObamaAdministrationannouncedenhancementstoHAMPaimedatthe unemploymentandnegativeequityproblems,includingprovidingtemporarymortgageassistanceto manyunemployedhomeowners,encouragingservicerstowritedownmortgagedebtaspartofaHAMP modification(thePrincipalReductionAlternative,orPRA),allowingmoreborrowerstoqualifyfor modificationsthroughHAMP,andhelpingadditionalborrowersmovetomoreaffordablehousingwhen modificationisnotpossible. UnemploymentProgram TheUnemploymentProgram(UP)requiresservicerstograntqualifiedunemployedborrowersa forbearanceperiodduringwhichtheirmortgagepaymentsaretemporarilyreducedforaminimumof threemonths,anduptosixmonthsforsomeborrowers,whiletheylookforanewjob.HAMPservicers arerequiredtoofferUPtoanyunemployedhomeownerwhoseHAMPeligibleloanhasnotbeen previouslymodifiedunderHAMPifthehomeownerhasbeenreceivingunemploymentbenefitsfor threemonthsonthedateoftherequest.Ifahomeownerdoesnotfindajobbeforethetemporary assistanceperiodisoverorfindsajobwithareducedincome,thehomeownerwillbeevaluatedfora permanentHAMPmodificationormaybeeligibleforHAMPsalternativestotheforeclosureprogram. Servicersareprohibitedfrominitiatingaforeclosureactionorconductingaforeclosuresalewhilethe borrowerisbeingevaluatedforUP,afteraforeclosureplannoticeismailed,duringtheUPforbearance orextension,andwhiletheborrowerisbeingevaluatedfororparticipatinginHAMPorHAFAfollowing theUPforbearanceperiod.ServicersarereimbursedbyTARPforanycostsassociatedwithUP,and therewillbenocosttogovernmentortaxpayersfromtheforbearanceplans. PrincipalReductionAlternative UnderPRA,servicersarerequiredtoevaluatethebenefitofprincipalreductionandareencouragedto offerprincipalreductionwhenevertheNPVresultofaHAMPmodificationusingPRAisgreaterthanthe NPVresultwithoutconsideringprincipalreduction.Theprincipalreductionandtheincentivesbasedon thedollarvalueoftheprincipalreducedwillbeearnedbytheborrowerandinvestorbasedonapayfor successstructure.Underthecontractwitheachservicer,Treasurycannotcompelaservicertoselect PRAoverthestandardHAMPmodificationeveniftheNPVofPRAisgreaterthantheNPVofregular HAMP. EnhancementstoHomeAffordableForeclosureAlternatives(HAFA) Treasuryalsodoubledrelocationassistancepaymentstohomeownersreceivingforeclosure alternatives,andincreasedincentivestoservicersandlenders,includingincentivesforextinguishment ofsubordinateliens,toencouragemoreshortsalesandotheralternativestoforeclosure.
.. FHAShortRefinance InMarch2010,theObamaAdministrationannouncedadjustmentstoexistingFHAprogramsthatwill permitlenderstoprovideadditionalrefinancingoptionstohomeownerswhoowemorethantheir homesareworthbecauseoflargedeclinesinhomepricesintheirlocalmarkets.Thisprogram,known astheFHAShortRefinanceprogram,willprovidemoreopportunitiesforqualifyingmortgageloansto berestructuredandrefinancedintoFHAinsuredloans.Thetermsofthisprogramincludethatthe homeownermustbecurrentontheexistingfirstlienmortgage;thehomeownermustoccupythehome asaprimaryresidenceandhaveaqualifyingcreditscore;themortgageinvestormustreducethe amountowedontheoriginalloanbyatleast10percent;thenewFHAloanmusthaveabalanceless thanthecurrentvalueofthehome;andtotalmortgagedebtfortheborroweraftertherefinancing, includingboththefirstlienmortgageandanyotherjuniorliens,cannotbegreaterthan115percentof thecurrentvalueofthehomegivinghomeownersapathtoregainequityintheirhomesand affordablemonthlypayments.TARPfundswillbemadeavailableupto$11billionintheaggregateto provideadditionalcoveragetolendersforashareofpotentiallossesontheseloansandtoprovide incentivestosupportthewritedownsofsecondliensandencourageparticipationbyservicers. HousingFinanceAgencyInnovationFundfortheHardestHitHousingMarkets OnFebruary19,2010,theAdministrationannouncedthe$1.5billionHousingFinanceAgency InnovationFundfortheHardestHitHousingMarkets(HFAHardestHitFund,orHHF)forstatehousing financeagenciesinthenationshardesthithousingmarketstodesigninnovative,locallytargeted foreclosurepreventionprograms.ThisfirstroundoftheHFAHardestHitFundwasintendedtohelp addressthehousingproblemsfacingthosestatesthathavesufferedanaveragehomepricedropof morethan20percentfromtheirrespectivepeaksinthehousingbubble.Thestatesincludedinthisfirst roundofHHFwereCalifornia,Florida,Arizona,Michigan,andNevada.Fundswereallocatedtothese statesaccordingtoaformulabasedonseverityofhomepricedeclinesandunemployment.HFAs designedthestateprogramsthemselves,tailoringthehousingassistancetotheirlocalneeds.Treasury requiredthattheprogramscomplywiththerequirementsofEESA,suchasseekingtopreventavoidable foreclosures.Allofthefundedprogramdesignsarepostedonlineat http://www.FinancialStability.gov/roadtostability/hardesthitfund.html. InMarch2010,theObamaAdministrationannouncedanexpansionoftheHFAHardestHitFundto targetanadditionalfivestateswithhighsharesoftheirpopulationslivinginlocalareasofconcentrated economicdistress.ThesecondHHFincludedupto$600millioninfundingforlocallytailoredmeasures tohelpfamiliesstayintheirhomesorotherwiseavoidforeclosure.The$600millioninfundsis equivalentonaperpersonbasistothe$1.5billionawardedinthefirstHHF.WhilethefirstHHF targetedfivestatesaffectedbyhomepricedeclinesgreaterthan20percent,thesecondHHFtargeted stateswiththehighestconcentrationoftheirpopulationslivingincountieswithunemploymentrates greaterthan12percent,onaverage,overthemonthsof2009.(Statesthatwereallocatedfundsunder thefirstHHFprogramwerenoteligibleforthesecondHHFprogram.)Thefivestatesthatreceived allocationsbasedonthiscriterionwereNorthCarolina,Ohio,Oregon,RhodeIsland,andSouthCarolina. OnAugust11,2010,inrecognitionoftheparticularchallengesfacedbystateswithextraordinarilyhigh unemployment,theAdministrationannouncedthatTreasurywillmakeanadditional$2billionof assistanceavailableforHHFprogramsforhomeownersstrugglingtomaketheirmortgagepaymentsdue tounemployment.The18statesandjurisdictionseligibleforthisadditionalfundinghadhighsustained
.. unemploymentratesoverthelast12months(throughJune,2010)thatwereatorabovethenational average.ThisincludesnineoftheoriginalHHFstates(California,Florida,Michigan,Nevada,North Carolina,Ohio,Oregon,RhodeIslandandSouthCarolina),whichcanusethefundingforanexisting unemploymentbridgeprogramortoimplementthemodelprovided,aswellasAlabama,theDistrictof Columbia,Georgia,Illinois,Indiana,Kentucky,Mississippi,NewJerseyandTennessee.Eachstatewill usethefundsfortargetedunemploymentprogramsthatprovidetemporaryassistancetoeligible homeownerstohelpthempaytheirmortgageswhiletheyseekreemploymentoradditional employmentorundertakejobtraining. OnSeptember29,2010,theAdministrationannouncedthatTreasurywillmakeanadditional$3.5billion ofassistanceavailableforthestatesandjurisdictionsparticipatinginHHFtoexpandthereachoftheir programstohelpmorestrugglinghomeowners.Fundswillbeallocatedtothese18statesandthe DistrictofColumbiabasedonpopulationsize. G. Accomplishments HAMPhasachievedthreecriticalgoals: Ithasprovidedimmediaterelieftomanystrugglinghomeowners; Ithasusedtaxpayerresourcesefficiently;and Ithastransformedthewaytheentiremortgageservicingindustryoperates. Eighteenmonthsintotheprogram,HAMPhashelpedmorethan1.3millionhomeownersbyreducing theirmonthlymortgagepaymentstomoreaffordablelevels.Thisincludesmorethan460,000 homeownerswhosemortgagetermshavebeenmodifiedpermanently.Thesehomeownershave experienceda36percentmedianreductionintheirmortgagepaymentsmorethan$500permonth amountingtoatotal,programwidesavingsofnearly$3.2billion.Inshort,hundredsofthousandsof AmericanfamilieshavebeenabletoavoidforeclosureandkeeptheirhomesbecauseofHAMP. HAMPserve[d]asacatalyst...amobilizingeventtopushservicerstotakebroaderactionsat amorerapidpace,andnotedthatitpushedotherinvestors,includingFannieandFreddie,to moveinadirectionofprogrammatichomeloanmodifications. WellsFargoHomeMortgageCoPresidentMichaelHeid(testimonybeforeCongress) 17 OneofthesignificantadvantagesofHAMPhasbeentheestablishmentofstandards.Andin particular,thedebttoincomeratiothatwasused,evenonourproprietaryprogramspriorto HAMP,washigherthan31percent. BankofAmericaHomeLoanPresidentBarbaraDeSoer(testimonybeforeCongress) 18
17
HearingsonForeclosurePreventionPartII:AreLoanServicersHonoringTheirCommitmentstoHelpPreserve Homeownership?beforetheCommitteeonOversightandGovernmentReformUnitedStatesHouseof Representatives(June24,2010)(statementofMichaelJ.Heid,CoPresidentofWellsFargoHomeMortgage).
.. IntheyearfollowinginitiationofHAMP,homeretentionstrategieschangeddramatically.Inthefirst quarterof2009,nearlyhalfofmortgagemodificationsincreasedborrowersmonthlypaymentsorleft theirpaymentsunchanged.Bythesecondquarterof2010,90percentofmortgagemodifications loweredpaymentsfortheborrower.Thischangemeansborrowersarereceivingbettersolutions. Modificationswithpaymentreductionsperformmateriallybetterthanmodificationsthatincrease paymentsorleavethemunchanged.Moreover,evenholdingthepercentagepaymentreduction constant,modificationsappeartohaveimprovedsince2008.Formodificationsmadein2008,15.8 percentofmodificationsthatreceiveda20percentpaymentreductionwere60daysormore delinquentthreemonthsintothemodification.Forthe2010vintage,thatdelinquencyratehasfallen almostinhalf,to8.2percent.TheOCCsMortgageMetricsReportfrom2010:Q2attributesthe improvementinmortgageperformancetoserviceremphasisonrepaymentsustainabilityandthe borrowersabilitytorepaythedebt. EarlyindicationssuggestthattheredefaultrateforpermanentHAMPmodificationsissignificantly lowerthanforhistoricalprivatesectormodificationsaresultoftheprogramsfocusonproperly aligningincentivesandachievinggreateraffordability.ForHAMPmodificationsmadeinthefourth quarterof2009,OCCrecordsshowthat7.9percentofloansweredelinquentthreemonthsintothe modificationandjust10.8percentweredelinquentsixmonthsintothemodification.Thecomparable delinquencyratesfornonHAMPmodificationsmadeinthesamequarterwere12.1percentand22.4 percent,respectively.Formodificationsmadeinthefirstquarterof2010,thedelinquencyratesfor HAMPandnonHAMPmodificationsaresimilar10.5percentand11.6percentdelinquentatthree months,respectively.ConvergencebetweentheHAMPandnonHAMPredefaultratesgoingforward maysuggestthattheindustryisadoptingtheHAMPmodificationstandard.

18HearingsonForeclosurePreventionPartII(statementofBarbaraDeSoer,PresidentofBankofAmericanHome Loans).
.. Figure6F:
RedefaultRates forLoansModifiedin2009,byPaymentReduction
PercentofLoans60+ daysDelinquent 70% Payment Increased
60% Payment Unchanged
50%
40%
30%
Payment Decreasedby Lessthan10% Payment Decreasedby 10%toLess than 20% Payment Decreasedby 20%orMore 3months
20%
10%
0% 6months 9months 12months MonthsSinceModification Source:OCCMortgageMetrics , 2010:Q2.http://www.occ.treas.gov/ftp/release/2010112a.pdf
BorrowerswhodonotultimatelyqualifyforHAMPmodificationsoftenreceivealternativeformsof assistance.ApproximatelyonehalfofhomeownerswhoapplyforHAMPmodificationsbutdonot qualifyhavereceivedsomeformofprivatesectormodification.Lessthantenpercenthavelosttheir homesthroughforeclosure.Industryrepresentativestestifyingatforeclosurepreventionhearings beforetheCommitteeonOversightandGovernmentReformUnitedStatesHouseofRepresentativeson June24,2010indicatedthatmanyoftheirprivatesectormodificationsareintendedtoassistborrowers whoarenoteligibleforHAMP. HAMPusestaxpayerresourcesefficiently.HAMPspayforsuccessdesignutilizesatrialperiodto ensurethattaxpayerfundedincentivesareusedonlytosupportborrowerswhoarecommittedto stayingintheirhomesandmakingmonthlypayments,andtheinvestorretainstheriskoftheborrower redefaultingintoforeclosure.Notaxpayerfundsarepaidtoaserviceroraninvestoruntilaborrower hasmadethreemodifiedmortgagepaymentsontimeandinfull.Themajorityofpaymentsaremade overafiveyearperiodonlyiftheborrowercontinuestofulfillthisresponsibility.Thesesafeguards ensurethatspendingislimitedtohighqualitymodifications.Comprehensivepublicreportingprovides anadditionallayerofaccountability,assuringthatservicersfulfilltheirobligationtocontactandhelpat riskborrowersinexchangefortaxpayerfundedincentives. Thereisaworthwhilepointtobemadeaboutwhoshouldcountasbeinghelpedbyadministration housingprograms.TheAdministrationoriginallyprojectedthatHAMPwouldofferhelptothreetofour millionfamiliesthroughtheendof2012,expectingmostofthesetofamiliestoactontheofferofhelp andtoreceiveapermanentmodification.FromoneperspectivecountingborrowerswhogetaHAMP permanentmodificationoraFHAShortRefinanceloanisoverinclusive,becausesomeofthefamilies willredefaultandendupinforeclosureinanyevent,althoughtheseprogramswillincreasetheodds
.. thattheycanpreventforeclosureandreceivevaluabletemporaryrelief(upto$6,000peryear)aslong astheyremaincurrent. Thecountisalsounderinclusive,becausemeasurestoreduceforeclosureshelptostabilizehousing marketsandavoidcommunitywidecostsofforeclosure.Themeasureisalsounderinclusivebecause everypersonwhoisinatemporarymodificationisgettingasignificantbenefitthefamilyhasseveral monthstoremaininthehomewithareducedpaymentandtotrytoremedythesituationandavoid foreclosure.ItisunderinclusivebecausehomeownersabletotakeadvantageofHAFAwillreceive significanthelptransitioningmorequicklyandlesstraumaticallytonewhousingtheycanaffordthan theywouldiftheysufferedforeclosure.Lastly,itisunderinclusivebecausemanyoftheunemployed homeownerswhoreceiveatemporaryforbearancethroughUParelikelytobecomereemployedand resumemortgagepaymentswithouttheunemploymentforbearanceprogramthosehomeowners mighthavegonetoforeclosure.ThisisespeciallyimportantinthecaseofFHAShortRefinance,which couldhelptoavertawaveofforeclosuresduetostrategicdefault,andHHF,whichhelpsstatesprovide targetedassistancetocombatdeterioratingconditionsinlocalmarkets.Asnotedabove,HAMPhas transformedthewaythemortgageservicingindustrytreatsborrowersindistress.BecauseofHAMP, servicershavedevelopedconstructiveprivatesectoroptions. Finally,themeasuredoesnotincludeallofthenewmortgagesprovidedtofamiliesatreasonablecost becauseofFHAandgovernmentinterventionswithFannieMaeandFreddieMac.Inmanycases,these mortgageshaveprovidedfinancingtohelpfamiliespurchaseforeclosedhomesandbecome homeowners,oftenforthefirsttimesincehousinghasbecomesomuchmoreaffordableasaresultof thecrisis. H. TransparencyandAccountability ToprotecttaxpayersandensurethateveryTARPdollarisdirectedtowardpromotingfinancialstability, Treasuryestablishedrigorousaccountabilityandtransparencymeasuresforallofitsprograms,including HAMPandtheotherhousingprograms,asmorefullydescribedlaterinthisreport.Inadditiontothese publicreports,Treasuryhasworkedtomaximizethetransparencyofthehousingprogramtoborrowers andensurethatservicersareheldaccountable.Everyborrowerisentitledtoaclearexplanationifheor sheisdeterminedtobeineligibleforaHAMPmodification.Treasuryhasestablisheddenialcodesthat requireservicerstoreportthereasonformodificationdenialsinwritingtoTreasury.Servicersare requiredtousethosedenialcodesasauniformbasisforsendingletterstoborrowerswhoare evaluatedforHAMPbutdeniedamodification.Inthoseletters,borrowerswillbeprovidedwitha phonenumbertocontacttheirservicersaswellasthephonenumberoftheHOPEhotline,whichhas counselorswhoaretrainedtoworkwithborrowerstohelpthemunderstandreasonstheymayhave beendeniedmodificationsandexplainothermodificationorforeclosurepreventionoptionsthatmay beavailabletothem. TransparencyoftheNPVmodelakeycomponentoftheeligibilitytestforHAMPisalsoimportant. TreasuryincreasedpublicaccesstotheNPVwhitepaper,whichexplainsthemethodologyusedinthe NPVmodel.Toensureaccuracyandreliability,FreddieMac,Treasuryscomplianceagent,conducts periodicauditsofservicersimplementationofthemodel.Ifservicers'modelsdonotmeetTreasury's NPVspecifications,FreddieMacwillrequiretheservicerstodiscontinueuseoftheirown implementationofthemodelandrevertbacktotheNPVapplicationavailablefromTreasurythrough theMHAServicerPortal.AsrequiredbytheDoddFrankAct,Treasuryispreparingtoestablishaweb
.. portalthatborrowerscanaccesstorunaNPVanalysisusinginputdataregardingtheirownmortgages, andtoprovidetoborrowerswhoareturneddownforaHAMPmodificationtheinputdatausedin evaluatingtheapplication. AllservicersvoluntarilyparticipatinginHAMPhavecontractuallyagreedtofollowtheHAMPprogram guidelines,whichrequiretheservicertoofferaHAMPmodificationtoalleligibleborrowersandtohave systemsthatcanprocessallHAMPeligibleloans.Servicersaresubjecttoperiodic,onsitecompliance reviewsperformedbyTreasuryscomplianceagent,MakingHomeAffordableCompliance(MHAC),a separate,independentdivisionofFreddieMac,toensurethatservicerssatisfytheirobligationsunder HAMPrequirementsinordertoprovideawellcontrolledprogramthatassistsasmanydeserving homeownersaspossibletoretaintheirhomeswhiletakingreasonablestepstopreventfraud,waste andabuse.TreasuryworkscloselywithMHACtodesignandrefinethecomplianceprogramand conductsqualityassessmentsoftheactivitiesperformedbyMHAC.Followingthesereviews,MHAC providesTreasurywithassessmentsofeachservicerscompliancewithHAMPrequirements.If appropriate,Treasurywillimplementremediesfornoncompliance.Theseremediesmayinclude withholdingorreducingincentivepaymentstoservicers,requiringrepaymentsofpriorincentive paymentsmadetoservicerswithrespecttoaffectedloans,orrequiringadditionalserviceroversight. I. LookingAheadforHousing SinceEESAwasenacted,thehousingmarkethasremaineddistressed,andalthoughtherearepromising signsofstabilization,thenatureofthatdistresshaschanged.Inlate2008and2009,thenations housingmarketwasinbroaddecline,asaresultofthesubprimemortgagecollapseandtheeffectsof thefinancialcrisisandthesevererecession.However,inthemiddleof2009,housepricedeclines startedtoshowsignsofstabilizationinmuchofthecountry.Homepricesleveledoffafter30straight monthsofdecline. Despitethesenascentsignsofstabilizationatthenationallevel,homepriceshavecontinuedtodecline andforeclosureshavecontinuedtoriseincertainareasofthecountryasthenatureofthestressinthe housingmarkethasevolvedfromdefaultsgeneratedbypoorlyunderwrittenloans,suchassubprime, AltAandoptionARMmortgages,toconcentratedunemployment,negativeequity,excesshousing inventory,andrisingforeclosuresincertainareasofthecountry,whichactasadragonhousingprices andeconomicrecoveryinthosecommunities.Negativeequityandhighunemploymenttendtobe concentratedinthesameregionsandappeartoexacerbateoneanother;lowequitylevelsgive unemployedborrowerslittleopportunitytoescapetheirmortgagesexceptthroughforeclosureorshort sale. Asdescribedabove,theAdministrationhasrespondedbyexpandingtheinitialversionofHAMPthat wasfirstannouncedinFebruary2009,whichwasdesignedtomodifyconventionalfirstlienloans. HAMPhassincebeenmodifiedtoincludeunemploymentprograms,secondlienrelief,foreclosure alternatives(suchasshortsalesanddeedsinlieuofforeclosure)andprincipalreductionprograms. Recognizingthatthehousingmarketconditionsvarywidelybylocality,andareespeciallystressedby continuedunemployment,theAdministrationhasquicklyrolledouttheHFAHardestHitFundforthose statesmostaffectedbytheseissues.Inaddition,tocombatnegativeequityandimproveaffordability, TreasuryhaspartneredwithFHAinexpandingrefinanceopportunitiesthroughtheFHAShortRefinance program.
.. Becausetheyarerelativelyrecentexpansions,theseadditionstoHAMP,andofHHFandtheFHAShort Refinanceprogram,havenotyetbeguntopenetratethehousingmarket.Nevertheless,theseprograms willallowFederalassistancetoreachmoredistressedhomeownersandprovideadditionalstabilityto thehousingmarketgoingforward.ServicersthatparticipateinHAMPcancontinuetomake modificationsthroughtheendof2012.HHFpermitsparticipatingHFAstoprovidesupportthrough theirprogramsuntilaslateas2017,dependingonavailablefunding.AndtheFHAShortRefinance programisexpectedtopermithomeownerstorefinancetheirmortgageloansandreducetheiroverall mortgagedebtthroughtheendof2012. Furthermore,inmuchthesamewaythatHAMPsfirstlienmodificationprogramhasprovidedanational blueprintformortgagemodifications,thesenewprogramswillcontinuetoshapethemortgage servicingindustryandactasacatalystforindustrystandardizationofshortsale,refinanceandprincipal reductionprograms.Theinterplayofalltheseprogramswillprovideamuchmoreflexibleresponseto continuedchangesinthehousingmarketoverthenexttwoyears.Ratherthanending,TARPspositive effectsonthehousingmarketareexpectedtoexpandovertime. J. SummaryDescriptionofHousingPrograms 1. MakingHomeAffordableProgram(MHA) a. HomeAffordableModificationProgram(HAMP) TheHomeAffordableModificationProgram(HAMP)isthelargestprogramwithinMHA.HAMPprovides eligiblehomeownerstheopportunitytoreducetheirmonthlymortgagepaymentsto31percentoftheir gross(pretax)income. ToqualifyforHAMP,aborrowermust: Ownaonetofourunithomethatisaprimaryresidence; HavereceivedamortgageonorbeforeJanuary1,2009; Haveamortgagepayment(includingprincipal,interest,taxes,insurance,andhomeowners associationdues)thatismorethan31percentofthehomeownersgrossmonthlyincome;and Owenotmorethan$729,750onafirstmortgageforaoneunitproperty(therearehigher limitsfortwotofourunitproperties). Tocreateanaffordablepayment,aparticipatingservicerappliesaseriesofmodificationstepsinthe followingorder:ratereductiontoaslowastwopercent;termextensionupto40years;andprincipal deferral(orforbearance,attheservicersoption).Themodifiedinterestrateisfixedforaminimumof fiveyears.Beginninginyearsix,theratemayincreasenomorethanonepercentagepointperyear untilitreachestheFreddieMacPrimaryMortgageMarketSurveyrate(essentiallythemarketinterest rate)atthetimethepermanentmodificationagreementwasprepared. Beforeamortgageispermanentlymodified,thehomeownermustmakethenew,reducedmonthly mortgagepaymentontimeandinfullduringatrialperiodofthreeorfourmonths.Homeownerswho
.. makepaymentsonpermanentlymodifiedloansontimeaccrueanincentiveof$1,000peryearto reducetheamountofprincipaltheyoweupamaximumof$5,000. b. SecondLienModificationProgram(2MP) UndertheSecondLienModificationProgram(2MP),anadditionalcomponentofMHA,Treasury providesincentivesforsecondlienholderstomodifyorextinguishasecondlienmortgagewhena modificationhasbeeninitiatedonthefirstlienmortgageforthesamepropertyunderHAMP.Under 2MP,whenaborrowersfirstlienismodifiedunderHAMPandtheservicerofthesecondlienisa2MP participant,thatservicermustoffertomodifytheborrowerssecondlienaccordingtoadefined protocol,whichprovidesforalumpsumpaymentfromTreasuryinexchangeforfullextinguishmentof thesecondlien,orareducedlumpsumpaymentfromTreasuryinexchangeforapartialextinguishment andmodificationoftheborrowersremainingsecondlien. c. HomeAffordableForeclosureAlternatives(HAFA)Program UndertheHomeAffordableForeclosureAlternatives(HAFA)Program,anadditionalcomponentof MHA,Treasuryprovidesincentivesforshortsalesanddeedsinlieuofforeclosureforcircumstancesin whichborrowersareunableorunwillingtocompletetheHAMPmodificationprocess.Borrowersare eligibleforrelocationassistanceof$1,500andservicersreceivea$1,000incentiveforcompletinga shortsaleordeedinlieuofforeclosure.Inaddition,investorsarepaidupto$1,000forallowingshort saleproceedstobedistributedtosubordinatelienholders. d. TheUnemploymentProgram(UP) TheUnemploymentProgram(UP),anadditionalcomponentofMHA,requiresparticipatingservicersto grantqualifiedunemployedborrowersaforbearanceperiodduringwhichtheirmortgagepaymentsare temporarilyreducedforaminimumofthreemonths,anduptosixmonthsforsomeborrowers,while theylookfornewjobs.Ifahomeownerdoesnotfindajobbeforethetemporaryassistanceperiodis overorfindsajobwithareducedincome,thehomeownerwillbeevaluatedforapermanentHAMP modificationormaybeeligibleforcertainalternativestothemodificationprogramunderMHA. e. PrincipalReductionAlternative(PRA) UnderthePrincipalReductionAlternative(PRA),anadditionalcomponentofMHA,servicersare requiredtoevaluatethebenefitofprincipalreductionandareencouragedtoofferprincipalreduction whenevertheNPVresultofaHAMPmodificationusingPRAisgreaterthantheNPVresultwithout consideringprincipalreduction.Incentivesarepaidbasedonthedollarvalueoftheprincipalreduced. 2. HousingFinanceAgencyInnovationFundfortheHardestHitHousingMarkets(HFAHardest HitFund,orHHF) TheHousingFinanceAgencyInnovationFundfortheHardestHitHousingMarkets(HFAHardestHit Fund,orHHF)allowsstatehousingfinanceagencies(HFAs)inthenationshardesthithousingmarkets todesigninnovative,locallytargetedforeclosurepreventionprograms.Fiveofthesestates(Arizona, California,Florida,MichiganandNevada)havehadaveragehomepricedeclinesgreaterthan20percent sincethehousingmarketdownturn,accountingforthemajorityofunderwatermortgagesinthe
.. country.Theremainingfourteenstatesandjurisdictions(Alabama,Georgia,Illinois,Indiana,Kentucky, Mississippi,NewJersey,NorthCarolina,Ohio,Oregon,RhodeIsland,SouthCarolina,Tennesseeand Washington,DC)haveconcentratedareasofeconomicdistressduetounemploymentorhadan unemploymentrateatorabovethenationalaverageforthepastyear. HFAsdesignedthestateprogramsthemselves,tailoringthehousingassistancetotheirlocalneeds. TreasuryrequiredthattheprogramscomplywiththerequirementsofEESA,suchasseekingtoprevent avoidableforeclosures.Allofthefundedprogramdesignsarepostedonlineat http://www.FinancialStability.gov/roadtostability/hardesthitfund.html. 3. SupportfortheFHAShortRefinanceProgram InMarch2010,theAdministrationannouncedadjustmentstoexistingFHAprogramsthatwillpermit lenderstoprovideadditionalrefinancingoptionstohomeownerswhoowemorethantheirhomesare worthbecauseoflargedeclinesinhomepricesintheirlocalmarkets.Thisprogram,knownastheFHA ShortRefinanceprogram,willprovidemoreopportunitiesforqualifyingmortgageloanstobe restructuredandrefinancedintoFHAinsuredloans. Amongotherrequirements: ThenewFHAloanmusthaveabalancelessthanthecurrentvalueofthehome;and Totalmortgagedebtfortheborroweraftertherefinancing,includingboththefirstlien mortgageandanyotherjuniorliens,cannotbegreaterthan115percentofthecurrentvalueof thehomegivinghomeownersapathtoregainequityintheirhomesandanaffordable monthlypayment. Themortgageinvestormustreducetheamountowedontheoriginalloanbyatleastten percent; Thehomeownermustbecurrentontheexistingfirstlienmortgage; Thehomeownermustoccupythehomeasaprimaryresidenceandhaveaqualifyingcredit score;
TARPfundswillbemadeavailableupto$11billionintheaggregatetoprovideadditionalcoverageto lendersforashareofpotentiallossesontheseloansandtoprovideincentivestosupportthewrite downsofsecondliensandencourageparticipationbyservicers.
7.ExecutiveCompensation ..
TreasuryImplementedtheExecutiveCompensationRestrictionsRequiredbytheLawsthatCreated theTroubledAssetReliefProgram EESAsetstandardsforexecutivecompensationandcorporategovernanceforrecipientsoffinancial assistanceundertheTARP.TheseexecutivecompensationstandardswerethenexpandedunderARRA andTreasurysInterimFinalRuleonexecutivecompensationpublishedonJune15,2009.Thisrule createdtheOfficeoftheSpecialMasterforTARPExecutiveCompensation,andKennethR.Feinbergwas appointedasSpecialMasterinJune2009. 1. RestrictionsonexceptionalassistancerecipientsandotherrecipientsofTARPfunds. EESA,asamendedbyARRAimposedrestrictionsonexecutivecompensationforallrecipientsof financialassistanceunderTARP.Therequirementsincludethefollowing: Limitsonbonusesandretentionawardsforthetopexecutives; Prohibitionongoldenparachutesforthetopexecutives; Limitsoncompensationtoexcludeincentivesonseniorexecutivestotakeunnecessaryand excessiverisksthatthreatenafirmsvalue; Prohibitiononcompensationplansthatencouragemanipulationofreportedearningsto enhancethecompensationofemployees,andaclawbackprovisiontopermitrecoveryof certainpaymentsbasedonearningsstatementsorothercriteriathatarelaterfoundtobe materiallyinaccurate; Establishmentofacompanywidepolicyregardingexcessiveorluxuryexpenditures; Establishmentofacompensationcommitteecomposedentirelyofindependentdirectors;and Arequirementforanannual,nonbindingsayonpayshareholdervoteregarding compensationrequiredtobedisclosedunderSECrules. Treasuryalsopromulgatedrulestoimplementtheseprovisionsthataddedadditionalrequirements. Theseincludedaprohibitiononpayingtaxgrossupstotopexecutives(whicharedesignedtoreduce oreliminatethetaxburdenonanexecutiverelatingtocompensationarrangements)andarequirement todisclosecertainexecutiveperquisites. TreasurysrulesalsocreatedtheOfficeoftheSpecialMaster,andgavetotheSpecialMasterthe responsibilitytoreviewandapprovethecompensationoftopexecutivesatfirmsthatreceived exceptionalassistance.ThesefirmswereAIG,BankofAmerica,Citigroup,GeneralMotors,Chrysler, AllyFinancial(formerlyGMAC)andChryslerFinancial.TherulerequiredtheSpecialMastertoreview theindividualpaypackagesofthetop25mosthighlycompensatedemployeesateachfirmandto reviewthecompensationstructuresforthenext26100employees.Therulealsooutlinedcertain principlesthattheSpecialMastermustfollowinmakinghisdecisions. TheSpecialMasterconductedextensivereviewsofexecutivecompensationatthesecompaniesforthe 2009and2010calendaryearsandimposedrequirementsbasedonthefollowingkeyprinciples:
Forthetop25individualpaypackages:to(i)limitcashsalary,(ii)payincentivesinlong termrestrictedstock,(iii)limitperquisitesandothercompensation,and(iv)limit executivepensionandretirementprograms;and Forthenext26100employeescompensationstructures:to(i)restrictshorttermcash compensation,(ii)tieincentivecompensationtorealachievement,(iii)makesure compensationstructureshavealongtermfocus,and(iv)alignpaypracticeswith shareholderandtaxpayerinterests.
ThereviewandapprovalbytheSpecialMasterhasledtosignificantreductionsincompensation atthesefirms.Thiswastoensurethatexecutivepayforthetop100employeesatthefirms thatreceivedexceptionalassistanceisinlinewithlongtermvaluecreationandfinancial stability.Forthefivefirmsthatwerestillexceptionalassistancerecipientsfor2010 determinations,alargemajority84percentoftop25executivescoveredbythe2009 determinationsremainedwiththecompaniesthroughthe2010determinations.Thecashand overallcompensationofmostexecutivesnewtothetop25,whomostlyfilledslotscreatedby employeedeparturespriortothe2009determinations,wasreducedsubstantiallyfrom historicallevels. KennethR.FeinbergobservedinhisFinalReportthatoftheseven[exceptionalassistance]firmsinitially subjecttotheOfficesjurisdiction,twohavecompletedrepaymenttothetaxpayersandthreemorehave beguntodosoinonecasefullyreturningtheexceptionalassistance...Fourfirmsremaininthe program,butIamencouragedbytheirrecordofretainingtopemployeesandaddingoutsidetalent,and hopefulfortheireventualrepayment. FinalReportofSpecialMasterforExecutiveCompensationKennethR.Feinberg,September 10,2010. ARRAalsorequiredtheSecretarytoconductaLookBackReviewofbonuses,retentionawards,and othercompensationpaidtoeachTARPrecipientsTop25beforetheintroductionoftheadditional requirements,todetermineifanypaymentswereinconsistentwiththepurposeofEESAorTARP,or otherwiseinconsistentwiththepublicinterest.TheOfficeoftheSpecialMastercarriedouttheLook BackReviewandpublisheditsfindingsinJuly2010.TheSpecialMasterdidnotdeterminethatany reviewedpaymentwasinconsistentwiththelaworthepublicinterest.However,thisoutcomedoes notexpressaconclusionthatthesepaymentswereappropriateoradvisable,particularlyinlightofthe circumstancesfacingthefinancialsystemgenerally,andsomeinstitutionsspecifically,inlate2008and early2009.Therefore,theSpecialMasterproposedthatallTARPrecipientsadoptaprospective compensationpolicy(abrakepolicy)thatwouldprovidecompaniestheauthoritytoalterpending paymentstoexecutivesintheeventofafinancialcrisis.
2. TARPhelpedcurbtheinfluenceofexcessivecompensationatTARPrecipients,andin doingso,helpedlaythegroundworkforcorporategovernancereform. Aftertwoyears,theexecutivecompensationlandscapehaschangedsignificantly.WhiletheOfficeof theSpecialMasterfocusedonitsresponsibilitiesunderTARP,amuchbroaderpolicyinitiativewas movingforward.Theseeffortsarecriticalstepstoaddresscompensationissuesthatcontributedtothe financialcrisis,andsignificantprogresshasbeenmadetodate. InSeptember2009,G20leadersconfirmedthatcompensationpracticesinthefinancial sectorbothreflectedandencouragedexcessiverisktaking,andendorsedstandards intendedtoaligncompensationpracticeswithlongtermvaluecreationandfinancial stability.Thesestandardsarebeingimplementedworldwide.
IntheUnitedStates,theFederalReserveandotherfederalbankingregulatorsissued guidingprinciplesonhowincentivecompensationatbanksshouldbedesignedtoprotect safetyandsoundness,andcommittedtoensuringthatbanksadopttheseprinciples.The SECenhancedexistingcompensationdisclosurerequirements.TheDoddFrankActlaw requirespubliccompaniestogiveshareholdersasayonpayvoteandstrengthens compensationcommitteesindependence.
KennethR.Feinbergobservedthatthereisaprofounddifferenceinperspectiveonexecutivepay practicesbetweensomefinancialinstitutionsandmanyofthetaxpayerswhosedollarsrescuedour economyandfinancialsystem.Toourgreatbenefit,theTreasuryrulesthatcreatedtheOfficeofthe SpecialMasteranticipatedtherangeofdifficultieswewouldencounter,andprovidedauthorityto confrontthemaswellasprinciplesfordoingso. FinalReportofSpecialMasterforExecutiveCompensationKennethR.Feinberg,September 10,2010. 3. FinalReportoftheSpecialMasterforExecutiveCompensation InSeptember2010,afterfourteenmonthsofservice,KennethR.FeinbergresignedasSpecialMasterfor TARPExecutiveCompensationandissuedtheFinalReportofSpecialMasterforExecutive CompensationKennethR.Feinberg(FinalReport).TheFinalReportsummarizestheworkoftheOffice oftheSpecialMasterforTARPExecutiveCompensationduringMr.FeinbergstenureasSpecialMaster andincludesanoverviewofthecompensationdeterminationsissuedforthe2009and2010calendar years.Thereportalsoreviews,amongotherthings,theprocesses(collectionofdataandanalysis)and standardsofreviewusedforthedeterminations. The517pagereportandexhibits,whichincludecopiesofalldeterminationletters,canbefoundat http://www.FinancialStability.gov/docs/Exhibits.pdfand http://www.FinancialStability.gov/docs/Final%20Report%20of%20Kenneth%20Feinberg%20 %20FINAL.PDF.
8.U.S.GovernmentAsShareholder ..
TheU.S.Governmentisareluctantshareholderinprivatecompaniesandhasnointerestinowning companiesoverthelongterm.Thisunusualroleisanunfortunateconsequenceofthefinancialcrisis andtherecession. TheObamaAdministrationhasstatedthatcoreprincipleswillguideTreasurysmanagementoffinancial interestsinprivatefirms.OnesuchprincipleisthattheUnitedStatesgovernmentwillnotinterferewith orexertcontroloverdaytodaycompanyoperations.Amongotherconsequences,suchinvolvement mightactuallyreducethevalueofthetaxpayersinvestmentsandimpedethesuccessfultransitionof thefirmstotheprivatesector. Incertaincases,Treasuryhassoughttopursuestrongupfrontconditionsatthetimeofinvestmentinto acompany,suchaschangestotheboardofdirectorsandmanagement,toensurethatTARPfundswere deployedinawaythatpromoteseconomicgrowthandfinancialstabilityandprotectstaxpayervalue. Thereafter,Treasuryhastakenacommercialapproachtoitsinvestments.Treasurydoesnotparticipate inthedaytodaymanagementofanycompanyinwhichithasaninvestmentnorisanyTreasury employeeadirectororofficerofanysuchcompany Treasurysinvestmentshavegenerallybeenintheformofnonvotingpreferredstock.Forexample,the preferredsharesthatTreasuryholdsinfinancialinstitutionsundertheCapitalPurchaseProgramdonot havevotingrightsexceptincertainlimitedcircumstances,suchasamendmentstothecharterofthe company,orintheeventdividendsarenotpaidforseveralquarters,inwhichcaseTreasuryhasthe righttoelecttwodirectorstotheboard. Inafewcases,Treasuryhasacquiredcommonstock.TheseincludeGeneralMotors,AllyFinancial (formerlyGMAC),CitigroupandChrysler,andafewsmallbanks. InthecaseswhereTreasuryhasacquiredvotingrights,ithasannouncedthatitwillfollowthefollowing principlesinexercisingitsvotingrights:(1)Treasuryintendstoexerciseitsrighttovoteonlyoncertain mattersconsistingoftheelectionorremovalofdirectors;certainmajorcorporatetransactionssuchas mergers,salesofsubstantialamountsofassets,anddissolution;issuancesofequitysecuritieswhere shareholdersareentitledtovote;andamendmentstothecharterorbylaws;and(2)onallother matters,Treasurywilleitherabstainfromvotingorvoteitssharesinthesameproportion(for,against orabstain)asallothersharesofthecompany'sstockarevoted. InthecaseofAIG,theU.S.TreasuryiscurrentlythebeneficiaryofatrustcreatedbytheFederalReserve BankofNewYork(FRBNY).Thattrustownsshareshaving79.8percentofthevotingrightsofthe commonstock.TheFRBNYhasappointedthreeindependenttrusteeswhohavethepowertovoteand disposeofthestockwithpriorapprovalofFRBNYandafterconsultationwithTreasury.Thetrust agreementprovidesthatthetrusteescannotbeemployeesofTreasuryortheFRBNY.Thetrustexists forthebenefitoftheU.S.Treasury,buttheDepartmentoftheTreasurydoesnotcontrolthetrustandit cannotdirectthetrustees.TreasuryalsodirectlyownspreferredstockinAIGwhichdoesnothave votingrightsexceptincertainlimitedcircumstances(suchasamendmentstothecharter).Treasuryhas therighttoappointdirectorsbecauseAIGfailedtopaydividendsforfourquartersonthepreferred stockheldbyTreasury.Uponconsummationoftheproposedrestructuringplanannouncedon September30,2010,Treasurywillreceivecommonsharesinexchangeforitspreferredstockandthe trustwillbedissolved.Asaresult,theTreasurywillownapproximately92percentofthecommonstock ofAIG.
9.AccountabilityandTransparency ..
TheDepartmentoftheTreasuryiscommittedtotransparencyandaccountabilityinallofitsprograms andpolicies,includingallprogramsestablishedunderEESA.Toprotecttaxpayersandensurethatevery dollarisdirectedtowardpromotingfinancialstability,Treasuryestablishedcomprehensive accountabilityandtransparencymeasures. A. ComprehensiveMeasures TreasurypublisheshundredsofreportsotherinformationaboutTARPsothatthepublicknowshow themoneywasspent,whoreceiveditandonwhatterms.Thisincludesallcontractsgoverningany investmentorexpenditureofTARPfunds,andmorethan275reportsovertwoyears.Allofthese reportsandinformationarepostedonourwebsite,www.FinancialStability.gov,including:
ListsofalltheinstitutionsparticipatinginTARPprograms,andalloftheinvestmentsTreasury hasmade; Allinvestmentcontractsdefiningthetermsofthoseinvestmentswithinfivetotenbusiness daysofatransactionsclosing; AllcontractswithTreasuryserviceprovidersinvolvedwithTARPprograms; Areportofeachtransaction(suchasaninvestmentinorrepaymentfromabank)withintwo businessdaysofcompletingthetransaction; Monthlyreportsofdividendandinterestreceived,whichallowtheAmericanpeopletoseeand evaluatetheinvestmentincometheyarereceivingfromtheseinvestments; MonthlyreportstoCongress,whichpresentupdatesonourinvestmentsandprogramsina clear,concisemanner,andanswerbasicquestionsthatmanyAmericanshave,suchashow TARPfundsareinvested; MonthlyreportsdetailingtheprogressofmodificationsundertheMakingHomeAffordable program; Allprogramguidelines,withintwobusinessdaysofanyprogramlaunch;and Amonthlylendingsurvey,andanannualuseofcapitalsurvey,whichcontainsdetailed informationonthelendingandotheractivitiesofbanksthathavereceivedTARPfundstohelp thepublicunderstandwhatbanksaredoingwiththeirTARPfunds.
PleaseseeSection10AdditionalResourcesforlinkstothereportsdescribedaboveandother informationrelatedtoTARPprograms. B. AuditedFinancialStatements TreasurypreparesseparatefinancialstatementsforTARPonanannualbasis.TheinitialAgency FinancialReportfortheyearendedSeptember30,2009isavailableat www.FinancialStability.gov,andthesecondAgencyFinancialReportfortheyearending September30,2010willbereleasedinNovember. Initsfirstyearofoperations,TARPsfinancialstatementsreceivedanunqualified(clean)audit opinionfromtheGovernmentAccountabilityOffice,andaseparatereportoninternalcontrol overfinancialreportingfoundnomaterialweaknessesunprecedentedachievementsfora startupoperationwithanextraordinaryemergencymission.Asaresultoftheseefforts,the
9.AccountabilityandTransparency ..
TreasuryofficeresponsibleforimplementingTARPtheOfficeofFinancialStabilityreceived aCertificateofExcellenceinAccountabilityReporting(CEAR)fromtheAssociationof GovernmentAccountants. C. OversightbyFourSeparateAgencies CongressalsoestablishedfouradditionalavenuesofoversightforTARP:

TheFinancialStabilityOversightBoard,establishedbyEESA104; SpecificresponsibilitiesfortheGovernmentAccountabilityOfficeassetoutinEESA116; TheSpecialInspectorGeneralforTARP,establishedbyEESA121;and TheCongressionalOversightPanel,establishedbyEESA125.
Treasuryhasproductiveworkingrelationshipswithallofthesebodies,andcooperateswitheach oversightagencysefforttoproduceperiodicauditsandreportsthatfocusonthemanyaspectsof TARP.Individuallyandcollectively,theoversightbodiesauditsandreportshavemadeand continuetomakeimportantcontributionstothedevelopment,strengthening,andtransparencyof TARPprograms. D. CongressionalHearingsandTestimony TreasuryofficialshavetestifiedinnumerousCongressionalhearingssinceTARPwascreated.Copies ofthewrittentestimonyarepreparedforthosehearingsandareavailableat www.FinancialStability.gov/latest/pressreleases.html.
10.AdditionalResources
A. Glossary 2MPSecondLienModificationProgram:2MPoffershomeownersawaytolowerpaymentsontheir secondmortgage. AAAorAaa:Thehighestratinggiventobondsbybondratingagencies. ABSAssetBackedSecurity:Afinancialinstrumentrepresentinganinterestinapoolofotherassets, typicallyconsumerloans.MostABSarecollateralizedbycreditcardreceivables,autoloans,student loans,mortgageloans,orotherloanandleaseobligations. ABXAssetBackedSecuritiesIndex:Ameasureoftheperformanceofagroupofcreditdefaultswaps onABShomeequityloans,thatservesasanindicatorofinvestorsentimentregardingtheperformance ofsubprimemortgageholdings. AGPAssetGuaranteeProgram:ATARPprogramunderwhichTreasury,togetherwiththeFederal ReserveandtheFDIC,agreedtosharelossesoncertainpoolsofassetsheldbysystemicallysignificant financialinstitutionsthatfacedahighriskoflosingmarketconfidencedueinlargeparttoaportfolioof distressedorilliquidassets. AIFPAutomotiveIndustryFinancingProgram:ATARPprogramunderwhichTreasuryprovidedloans orequityinvestmentsinordertoavoidadisorderlybankruptcyofoneormoreautocompaniesthat wouldhaveposedasystemicrisktothecountrysfinancialsystem.. AIGAmericanInternationalGroup,Inc. AltA:Acategoryofmortgageswhichhaveariskpotentialthatisgreaterthanprimebutlessthan subprime. ARRAAmericanRecoveryandReinvestmentActof2009:Anactthatcontained,amongotherthings, aneconomicstimuluspackageandamendmentstoEESAthatrequiretheSecretarytoallowQFIsto repayTARPassistanceatanytime,subjecttoregulatoryapproval. ASSPAutoSupplierSupportProgram:ATARPprogrampursuanttowhichTreasuryprovidedloansto ensurethatautosuppliersreceivecompensationfortheirservicesandproducts,regardlessofthe conditionoftheautocompaniesthatpurchasetheirproducts. AWCPAutoWarrantyCommitmentProgram:ATARPprogrampursuanttowhichTreasuryprovided loanstoprotectwarrantiesonnewvehiclespurchasedfromGeneralMotorsandChryslerduringtheir restructuringperiods. BHCBankHoldingCompany:Acompanythatcontrolsabank.Typically,acompanycontrolsabank throughtheownershipof25percentormoreofitsvotingsecurities. CAPCapitalAssistanceProgram:ATARPprogram,createdinconnectionwiththeSCAPorstresstest, inwhichTreasuryofferedassistancetofinancialinstitutionstoensurethattheyhadadequatecapital toabsorblossesandtocontinuetolendeveninaworsethanexpectedeconomicdownturn.Nofunds wereprovidedundertheprogram.
CBLIConsumerandBusinessLendingInitiative:AseriesofprogramscreatedunderTARPwhich includedtheTALF,theCDCI,andtheSBA7(a)SecuritiesPurchaseProgram.Theseweredesignedto jumpstartthecreditmarketsthatprovidefinancingtoconsumersandbusinessesandotherwise supportsmallbanks. CBOCongressionalBudgetOffice. CDCICommunityDevelopmentCapitalInitiative:ATARPprogramthatprovideslowcostcapitalto CDFIstoencouragelendingtosmallbusinessesandhelpfacilitatetheflowofcredittoindividualsin underservedcommunities. CDFICommunityDevelopmentFinancialInstitution:Afinancialinstitutionthatfocusesonproviding financialservicestolowandmoderateincome,minorityandotherunderservedcommunities,andis certifiedbytheCDFIFund,anofficewithinTreasurythatpromoteseconomicrevitalizationand communitydevelopment. CDOCollateralizedDebtObligation:Afinancialinstrumentthatentitlestheholdertoaportionofthe cashflowsgeneratedbyaportfolioofassets,whichmayincludebonds,loans,mortgagebacked securities,orotherCDOs. CDXCreditDefaultSwapIndex:Ameasureoftheperformanceofagroupofcreditdefaultswaps. CMBSCommercialMortgageBackedSecurities:Afinancialinstrumentrepresentinganinterestina commercialrealestatemortgageoragroupofcommercialrealestatemortgages. CMBXCommercialMortgageBackedSecuritiesIndex:Ameasureoftheperformanceofabasketof creditdefaultswapsoncommercialmortgagebackedsecurities. CPPCapitalPurchaseProgram:ATARPprogrampursuanttowhichTreasuryinvestedinpreferred equitysecuritiesandothersecuritiesissuedbyfinancialinstitutions.. CreditDefaultSwapAcontractbetweentwopartiespursuanttowhichonepartyagreestomake periodicpaymentsinexchangeforthecounterpartysagreementtopayasumofmoneyuponthe occurrenceofacreditdefaultorothereventrelatingtoaparticularfinancialinstrument. DoddFrankActDoddFrankWallStreetReformandConsumerProtectionActof2010. DTIDebttoIncomeRatio:Aratioofthedebtofapersontotheincomeofsuchperson. EESAEmergencyEconomicStabilizationActof2008:ThelawthatcreatedtheTroubledAssetRelief Program(TARP). FannieMaeFederalNationalMortgageAssociation. FDICFederalDepositInsuranceCorporation. FHAFederalHousingAdministration. FHFAFederalHousingFinanceAgency.
FRBNYFederalReserveBankofNewYork. FreddieMacFederalHomeLoanMortgageCorporation. GAOGovernmentAccountabilityOffice. GSEGovernmentSponsoredEnterprises:PrivatecorporationscreatedbytheU.S.Government. FannieMaeandFreddieMacareGSEs. HAFAHomeAffordableForeclosureAlternativesProgram:HAFAoffershomeowners,theirmortgage servicers,andinvestorsanincentiveforcompletingashortsaleordeedinlieuofforeclosure. HAMPHomeAffordableModificationProgram:ATARPprogramTreasuryestablishedtohelp responsiblebutstrugglinghomeownersreducetheirmortgagepaymentstoaffordablelevelsandavoid foreclosure. HERAHousingandEconomicRecoveryActof2008. HFA:AstateorlocalHousingFinanceAgency. HFAHardestHitFund(HHF)TheHousingFinanceAgencyInnovationFundfortheHardestHit HousingMarkets:AprogramTreasuryestablishedunderTARPtoallowHFAsinthenationshardesthit housingmarketstodesigninnovative,locallytargetedforeclosurepreventionprograms. HFSTHAHelpingFamiliesSaveTheirHomesActof2009. HUDU.S.DepartmentofHousingandUrbanDevelopment. IMFInternationalMonetaryFund. IPOInitialPublicOffering. LegacySecurities:CMBSandnonagencyRMBSissuedpriorto2009thatwereoriginallyratedAAAor anequivalentratingbytwoormoreNRSROswithoutratingsenhancementandthataresecureddirectly byactualmortgageloans,leasesorotherassetsandnotothersecurities. LIBORLondonInterbankOfferedRate:Therateofinterestatwhichbanksborrowfundsfromother banks,inmarketablesize,intheLondoninterbankmarket.LIBORratesaredisseminatedbytheBritish BankersAssociation. MHAMakingHomeAffordable:AcomprehensiveplantostabilizetheU.S.housingmarketandhelp responsible,butstruggling,homeownersreducetheirmonthlymortgagepaymentstomoreaffordable levelsandavoidforeclosure.HAMPispartofMHA. MBSMortgageBackedSecurities:AtypeofABSrepresentinganinterestinapoolofsimilar mortgagesbundledtogetherbyafinancialinstitution.
NPVNetPresentValue:AnNPVtestisusedtocomparethenetpresentvalueofcashflowsfromthe mortgageifmodifiedunderHAMPandthenetpresentvalueofthecashflowsfromthemortgage withoutmodification. NRSRONationallyRecognizedStatisticalRatingOrganization:Acreditratingagencywhichissues creditratingsthattheU.S.SecuritiesandExchangeCommissionpermitsotherfinancialfirmstousefor certainregulatorypurposes. NonAgencyResidentialMortgageBackedSecurities:RMBSthatarenotguaranteedorissuedby GinnieMae,FreddieMac,FannieMae,anyotherGSEoraU.S.federalgovernmentagency. OFSOfficeofFinancialStability,theofficewithinTreasurythatimplementsTARP. PRAPrincipalReductionAlternativeProgram:Aprogramthatoffersmortgagerelieftoeligible homeownerswhosehomesareworthsignificantlylessthantheremainingamountsowedundertheir firstlienmortgageloans. PreferredStock:Equityownershipthatusuallypaysafixeddividendandgivestheholderaclaimon corporateearningssuperiortocommonstockowners.Preferredstockalsohaspriorityinthe distributionofassetsinthecaseofliquidationofabankruptcompany. PPIFPublicPrivateInvestmentFund:AninvestmentfundestablishedtopurchaseLegacySecurities fromfinancialinstitutionsunderPPIP. PPIPPublicPrivateInvestmentProgram:ATARPprogramdesignedtoimprovethehealthoffinancial institutionsholdingrealestaterelatedassets.Theprogramisdesignedtoincreasetheflowofcredit throughouttheeconomybyTreasurypartneringwithprivateinvestorstopurchaselegacysecurities fromfinancialinstitutions. PSPAPreferredStockPurchaseAgreements:Thepreferredstockpurchaseagreementsthatwere enteredintobyTreasuryandtheGSEspursuanttoHERA. QFIQualifyingFinancialInstitution:PrivateandpublicU.S.controlledbanks,savingsassociations, bankholdingcompanies,certainsavingsandloanholdingcompanies,andmutualorganizations. RMBSResidentialMortgageBackedSecurities:Afinancialinstrumentrepresentinganinterestina groupofresidentialrealestatemortgages. SPPIPTheLegacySecuritiesPublicPrivateInvestmentProgram. SBAU.S.SmallBusinessAdministration. SBA7(a)LoanGuaranteeProgram:ASBAloanprogrampursuanttowhichtheSBAguaranteesa percentageofloansforsmallbusinessesthatcannototherwiseobtainconventionalloansatreasonable terms. SBA7(a)SecuritiesPurchaseProgram:ATARPprogramunderwhichTreasurypurchasessecurities backedbytheguaranteedportionsoftheSBA7(a)loans.
SCAPSupervisoryCapitalAssessmentProgram:Anassessmentofcapital,sometimesreferredtoas thestresstest,conductedbyfederalbankingsupervisorstodetermineifthelargestU.S.financial organizationshadsufficientcapitalcontinuelendingandabsorbthepotentiallossesthatcouldresult fromamoreseveredeclineintheeconomythanprojected. SEC:U.S.SecuritiesandExchangeCommission. Servicer:Anentitythatcollectspaymentsandmaintainsaccountsregardingmortgageloans. SIGTARPTheSpecialInspectorGeneralfortheTroubledAssetReliefProgram. SPVSpecialPurposeVehicle:Anoffbalancesheetlegalentitythatholdsthetransferredassets presumptivelybeyondthereachoftheentitiesprovidingtheassets(e.g.,legallyisolated). StressTest:SeeSCAP. TIPTargetedInvestmentProgram:ATARPprogramthatTreasurycreatedtostabilizethefinancial systembymakinginvestmentsininstitutionsthatarecriticaltothefunctioningofthefinancialsystem. TALFTermAssetBackedSecuritiesLoanFacility:AprogramunderwhichtheFederalReserveBankof NewYorkmadetermnonrecourseloanstobuyersofAAAratedAssetBackedSecuritiesinorderto stimulateconsumerandbusinesslendingbytheissuersofthosesecurities.TreasuryusedTARPfunds toprovidecreditsupportfortheTALFaspartofitsConsumerandBusinessLendingInitiative. TARPTroubledAssetReliefProgram:TheTroubledAssetReliefProgram,whichwasestablished underEESAtostabilizethefinancialsystemandpreventasystemiccollapse. Tier1Capitalorcorecapital:Ameasureofabanksassetsandliabilitiesthatincludesprimarily commonequity(includingretainedearnings),limitedtypesandamountsofpreferredequity,certain minorityinterests,andlimitedtypesandamountsoftrustpreferredsecurities,butexcludesgoodwill, certainotherintangiblesandcertainotherassets.Itisusedbybankingregulatorsasameasureofa banksabilitytosustainfuturelossesandstillmeetdepositorsdemands. Tier1Common(alsoknownasTangibleCommonEquityorTCE):Ameasureofabanksassetsand liabilitiescalculatedbyremovingallnoncommonelementsfromTier1Capital,e.g.,preferredequity, minorityinterests,andtrustpreferredsecurities.Itcanbethoughtofastheamountthatwouldbeleft overifthebankweredissolvedandallcreditorsandhigherlevelsofstock,suchaspreferredstock,were paidoff.Tier1Commonisthehighestqualityofcapitalinthesenseofprovidingabufferagainstloss byclaimantsonthebank.Tier1CommonisusedincalculatingtheTier1CommonRatiowhich determinesthepercentageofabankstotalassetsthatiscategorizedasTier1Common.Thehigherthe percentage,thebettercapitalizedthebank.Preferredstockisanexampleofcapitalthatmaybe countedinTier1Capital,butnotinTier1Common. TruPsTrustPreferredSecurity:Asecuritythathasbothequityanddebtcharacteristics,createdby establishingatrustandissuingdebttoit.Acompanymaycreateatrustpreferredsecuritytorealizetax benefits,sincethetrustistaxdeductible. UPUnemploymentProgram:TheHomeAffordableUnemploymentProgramisasupplemental programtoHAMPwhichprovidesassistancetounemployedborrowers.
Warrant:Afinancialinstrumentthatrepresentstheright,butnottheobligation,topurchaseacertain numberofsharesofcommonstockofacompanyatafixedprice. WarrantPreferredorWarrantSubDebt:ForCPPinvestmentsinaprivatelyheldcompany,anS corporation,orcertainmutualinstitutions,Treasuryreceivedwarrantstopurchase,atanominalcost, additionalpreferredstock(thesesecuritiesarereferredtoaswarrantpreferreds)orsubordinated debentures(thesesecuritiesarereferredtoaswarrantsubdebt)equivalenttofivepercentofthe aggregateliquidationpreferenceoftheprimaryCPPinvestment.
B. LinkstoFurtherInformation OfficeofFinancialStability,U.S.DepartmentoftheTreasury FinancialStabilitywebsite:http://www.FinancialStability.gov/ AgencyFinancialReportforFiscalYear2009: http://www.ustreas.gov/press/releases/OSF%20AFR%2009.pdf WarrantSales WarrantDispositionReports:http://www.FinancialStability.gov/latest/reportsanddocs.html TreasuryAnalysisofWarrantAuctionResults(March18,2010): www.Treas.gov/offices/economicpolicy/reports/AuctionAnalysis3182010.pdf PublicPrivateInvestmentProgramQuarterlyReports: www.FinancialStability.gov/roadtostability/legacysecurities.html#reports HousingInitiatives MonthlyServicerandPerformanceReport:www.FinancialStability.gov/latest/reportsanddocs.html MakingHomeAffordableWebsite:www.MakingHomeAffordable.gov HomeAffordableModificationProgramwebsite(includesSupplementalDirectivesandtheMHA Handbook):www.HMPadmin.com MonthlyHousingScorecardfromtheU.S.DepartmentofHousingandUrbanDevelopment(HUD): www.HUD.gov/scorecard AutomotiveCompanyPrograms: ExecutiveOfficeofthePresident,ALookBackatGM,ChryslerandtheAmericanAutoIndustry (April21,2010): http://www.whitehouse.gov/sites/default/files/rss_viewer/one_year_later_autos_report.pdf SupervisoryCapitalAssistanceProgramandCapitalAssistanceProgram
SCAPWhitePaper:http://www.FederalReserve.gov/bankinforeg/bcreg20090424a1.pdf OfficeoftheSpecialMasterforTARPExecutiveCompensation www.FinancialStability.gov/about/executivecompensation.html FinalReportoftheSpecialMasterforTARPExecutiveCompensationKennethR.Feinberg: http://www.FinancialStability.gov/about/executivecompensation.html

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Treasury NPV

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Treasury NPV

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UNITED STATES DEPARTMENT OF THE TREASURY

OFFICE OF FINANCIAL STABILITY

Two Year Retrospective

Troubled Asset Relief Program:

Troubled Asset Relief Program Ofce of Financial Stability

Maximum Allocation $ $ $ $ $ $ $ $ 250 82 70 22.4 4.3 0.4 0.8 45.6 $475

Total Spent $ $ $ $ $ $ $ $ 245 80 48 14.2 0.1 0.4 0.6 0.5 $388

% Repaid 78% 14% $ $

Income 26.8 2.6

.................................................................................................................................................. TroubledAssetReliefProgramTwoYearRetrospectiveOctober2010 iii

4 2003 2006 CrisisPeak Today

3 2003 2006 CrisisPeak Today

1 -17 -46 -51 22 -29

Bank warrant sales $8.2

Automotive programs $2.8 PPIP $0.2

Bank capital programs $18.6

Finish ofworstweek forstock marketin75years TARPisenacted

250 200 150 100 50 0 2006 2007

LehmanBrothers failure Treasuryandthe Federal ReservelaunchTALF

BNP Paribasfreezes3 investmentfunds Financial StabilityPlan

Stress test results announced

3 2003 2006 CrisisPeak Today

AlthoughRealtyTracreportsthatJuly2010foreclosureactivitywas10percentlowerthaninJuly2009, foreclosureswerestillupnearly20percentsinceJuly2008,andJuly2010markedtheseventeenth consecutivemonthofforeclosureactivityexceeding300,000filings.

18.5 18.2 TALF Issuance

8.2 8.1 8.3 2.9

2006VINTAGE ABX&2007VINTAGE CMBXAAAPRICES

3/23/09 PPIP Announcement

Treasury Positions in AIG, post-Restructuring

Total Treasury $69.8

0.563 $21.9 $21.9

$64.3 $22.3 $16.8

ShareofLoans90+ DaysDelinquent orInForeclosure

Onthemeasureofneighborhoodandhousingmarketstabilization,thesubstantialnumberof foreclosuresalesavoidedhascontributedtoamaterialimprovementinmarketexpectationsforhouse pricesandtomanysuccessivemonthsofstabilityinhomepricesinmuchofthecountry.But,as

HearingsonForeclosurePreventionPartII:AreLoanServicersHonoringTheirCommitmentstoHelpPreserve Homeownership?beforetheCommitteeonOversightandGovernmentReformUnitedStatesHouseof Representatives(June24,2010)(statementofMichaelJ.Heid,CoPresidentofWellsFargoHomeMortgage).

60% Payment Unchanged

0% 6months 9months 12months MonthsSinceModification Source:OCCMortgageMetrics , 2010:Q2.http://www.occ.treas.gov/ftp/release/2010112a.pdf

TARPfundswillbemadeavailableupto$11billionintheaggregatetoprovideadditionalcoverageto lendersforashareofpotentiallossesontheseloansandtoprovideincentivestosupportthewrite downsofsecondliensandencourageparticipationbyservicers.

TheFinancialStabilityOversightBoard,establishedbyEESA104; SpecificresponsibilitiesfortheGovernmentAccountabilityOfficeassetoutinEESA116; TheSpecialInspectorGeneralforTARP,establishedbyEESA121;and TheCongressionalOversightPanel,establishedbyEESA125.

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